ABSTRACT
How will the euro affect transatlantic relations? Even while partners in a political and military alliance, Europe and the United States have long been rivals in monetary affairs. Until recently, however, it was a rather one-sided contest, since Europe had no currency-not even the fabled Deutschmark (DM)—that could effectively match the U.S. dollar as international money. Now Europe has the euro, which many have predicted will quickly emerge as a potent competitor to America’s greenback. Could growing rivalry between the dollar and the euro endanger the larger European-American partnership? The dollar today is the only truly global currency, used for all the familiar
purposes of money-medium of exchange, unit of account, and store of value. Resentment has long simmered among Europeans sensitive to the inordinate power that the greenback gives the United States-America’s “exorbitant privilege,” in Charles de Gaulle’s memorable phrase. The European Union (EU) is the equal of the United States in economic output and trade. Why should it not be America’s equal in monetary matters, too? For many Europeans, this is the “hidden agenda” of the Economic and Monetary Union (EMU). Some degree of monetary conflict, therefore, would seem inevitable. In turn, monetary conflict could spill over into a broader geopolitical confrontation. Can the dominance of the dollar be challenged? The answer to this critical
question comes first by looking at the logic of market competition and second by examining government preferences. Treating the logic of market competition alone, the answer is clear. Despite its recent travails in the exchange markets, the dollar will continue to prevail as the world’s only truly global currency. The euro will of course dominate monetary relations within the European region and may even extend its influence to some neighboring areas, such as the Mediterranean littoral or sub-Saharan Africa. But elsewhere, for the foreseeable future, Europe’s new money is fated to remain a distant second to the greenback, however much many Europeans would prefer otherwise. Once we factor in government preferences, however, the outlook becomes
cloudier. The Europeans can be expected to make every effort to promote the market appeal of their new currency. The greenback’s global dominance will
not go unchallenged. But will Europe go further, to seek formation of an organized monetary bloc with foreign governments? That is less certain. At the present time, there seems little reason to believe that Europeans are prepared to push currency confrontation with the United States to the point where it might jeopardize more vital political and security interests. The risk of a serious collision, accordingly, appears low. Mutual restraint, I argue, is the much more likely scenario.
