Insight
Can the euro rival the dollar?
by Adam Tooze and Christian Odendahl 4 December 2018 The international role of the US dollar is deeply entrenched. To change that, Europe – and Germany in particular – would need to rethink some core economic policies. The dominance of the US dollar is a standing provocation to those who envision a more significant role for the EU in world affairs. The European economy is comparable in size and sophistication to the US economy, but its currency, the euro, plays second fiddle. For a long time, the dollar’s dominance did not seem to matter much. It did bring the US major benefits: cheap and almost limitless funding for its government, firms and consumers; and the ability to impose effective international sanctions, as the dollar’s dominance meant that no firm could violate them without risking major fines. But the US was not exploiting those advantages at the expense of Europe. Now the Trump administration is weaponising economic policy, making the euro’s standing in global markets a question of foreign policy, rather than simply of economics. But the ambition to give the euro a greater role in global markets faces huge economic and political obstacles. Not only is the dollar’s role in the world economy deeply entrenched. The policy changes that would bring about the conditions necessary for growing the euro’s role – an ample supply of European safe assets and a European Central Bank (ECB) that recognises its worldwide responsibilities – would meet fierce resistance, especially in Berlin. Likewise, the consequences of increased global demand for the euro would challenge some of the eurozone’s core policies. Three things determine whether a currency is a reserve currency. The first is a currency’s role in worldwide transactions, such as trade invoicing and the financial transactions that facilitate trade. When two firms from countries with different currencies engage in a transaction, the most efficient currency to use is one that both can easily reuse for further transactions or exchange into their local currency with minimal risk of losses. As a result, most world trade is invoiced in a few dominant currencies. The US dollar is the most used trade currency, even when US companies are not involved. According to calculations by the International Monetary Fund’s (IMF) new chief economist, Gita Gopinath, 80 per CER INSIGHT: Can the euro rival the dollar? 4 December 2018
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