István Dobozi;
euro; dollar;
2024-04-26 06:00:00
Recently, Népszava reported on the report of the prestigious Forum of Official Monetary and Financial Institutions based in London under the title “The world is waiting for better days, the latter comes out better in the rivalry between the dollar and the euro”. The question arises: how realistic is this optimistic forecast for the euro?
It is a fact that behind the introduction of the euro a quarter of a century ago, there was not only an effective symbol of unity and the goal of creating the European Monetary Union, but also a geopolitical consideration: reducing dependence on the American financial system and the oppressive dominance of the dollar. The term “geopolitical euro” was already known at that time. The French in particular were jealous of the dollar king’s hegemony with “extraordinary privileges” (read: unilateral American advantages). It is not by chance that Paris has become the main proponent of the euro, a strong common currency intended to counterbalance the American currency. Jean-Claude Juncker, the former president of the European Commission, openly advocated for reducing dependence on the American financial system by increasing the global role of the euro. He called it abnormal, for example, the fact that four-fifths of EU member states’ energy imports are billed in dollars, while only a few percent of European energy imports come from the United States.
Even today, there are voices in Brussels who are dissatisfied with the limited international role of the euro outside the EU, for example with the fact that the single currency could barely rise above one-fifth of global currency reserves in two decades, and it essentially remained a regional, European currency in international payments. It is particularly ominous that since 2010 the share of the euro in the world’s currency reserves has fallen from 28 percent to 20 percent. But even so, it remained the second most important currency behind the “green belly”. The share of the euro in international payments is only 15 percent, but it is largely concentrated on the intensive trade between each other within Europe.
Having followed the balance of power between the most important currencies for a long time, I see that – contrary to the London report and some bloody expectations in Brussels – there will be no significant shift in the global position of the euro in the foreseeable future. What’s more, the possible continuation of the declining trend in the sphere of currency reserves cannot be ruled out. Several factors play a role in this.
Due to the marked heterogeneity between the twenty member countries of the euro area, the market for excellent, AAA-rated government and corporate bonds available at the level of the currency union is relatively limited. Although, for example, both Greek and German government bonds are listed in euros, due to the sizeable risk difference, investor demand for the two papers is far from the same outside the zone. But the situation is similar between Italian and French investment papers. Due to the almost complete absence of a fiscal union and incomplete capital market integration, the national capital markets remained quite fragmented. And a euro bond jointly issued and guaranteed at the EU level is as rare as a white raven.
Overall, the volume of AAA-rated Eurobonds issued and the liquidity of the EU money markets in general are quite limited for moneyed foreign buyers (China, Japan, Middle Eastern oil states, etc.), dwarfed by the supply of high-quality US bonds and the high sophistication of overseas money markets. Apart from Germany, several other central EU countries do not want to take on the debt burden of the southern European member states in the form of common euro bonds. The prolonged existential crisis of the single European currency more than a decade ago – with Greece in focus – did not increase long-term investor confidence in the euro.
In contrast, the integrated, sophisticated, and liquid financial markets of the United States have an almost unlimited supply of the highest AAA-rated securities—especially Treasury bills, considered the safest investments worldwide—that keep foreign demand for the dollar buoyant. Added to this is the traditional position of the dollar as a safe haven currency: in strong global economic storms, the American currency is the safest haven, even when – as happened in 2008-2009 – the global financial crisis originates from the United States itself.
Another important reason why the global weight of the euro is not increasing is the high, long-term trade surplus of the euro area vis-à-vis outside countries. In order for there to be far more euros in circulation outside of Europe than at present, and for the currency to become more globalized, the euro area would have to persistently produce a massive trade deficit with the rest of the world. However, this is unachievable without Germany – the main producer of the European export surplus – abandoning its specifically mercantilist, export-maximizing orientation, which is unlikely.
The strong international status of the dollar has been significantly contributed to by the USA’s persistently large trade balance deficit – which has been observed for more than half a century – as a result of which a massive volume of dollars – cash and securities – is constantly flowing out of America. It is no coincidence, for example, that about half of the dollar banknotes are in circulation abroad, which is why the “green belly” is considered the real world money.
Similar to the case of the euro, the “internationalization” of the yuan – strongly pushed by Beijing – is also limited by China’s aggressive mercantilist trade policy resulting in a large export surplus, the intensity of which exceeds that of Germany, triggering a protectionist backlash against the Asian superpower’s exports. Let’s add: In Beijing, a significant increase in the world weight of the national currency is an incomparably more serious foreign policy interest than increasing the global role of the euro in Brussels. For China, the coveted multipolar world order is inseparable from “de-dollarization”, the establishment of a multipolar currency system in which the yuan would play a role proportional to the country’s weight in the world economy.
However, there is one factor that could potentially see the euro expand somewhat at the expense of the dollar: Washington is increasingly deploying its currency as a geopolitical weapon against its enemies. In view of the gnawing US financial sanctions – especially in the global South – more and more governments feel the need to limit the weight of financial transactions conducted in dollars. (This is one of the undisclosed goals of the de facto Chinese-led BRICS grouping.) However, it is likely that the yuan will benefit more from this situation than the euro, all the more so because its most severe financial sanctions (see, for example, Russia against Ukraine ) Washington is closely coordinating with its European allies.
On balance: I do not consider it realistic that the euro will gain significant ground at the expense of the dollar in international financial affairs in the foreseeable future, the basic conditions for this are lacking in the European currency area. The long-time leading insider key currency can enjoy the benefits of the moment of inertia for a long time, not to mention the continued benefits of the vast and sophisticated US financial markets. In the developing tripolar – dollar, euro, yuan – international currency system, it would be a success for the euro if it were to retain its role as the world’s second most important currency in the long term at roughly the current level.
The author is a former senior economist of the World Bank.
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