European Union policymakers like to make the point that, had the euro not existed, Europe would have suffered far more from the financial crisis and recession. Without the euro, there would have been a riot of competitive devaluations, causing angry recriminations among governments. Without the euro, countries such as Greece and Italy would have had nowhere to shelter from the storm. Without the euro, Ireland would have gone belly up and Dublin would be known as Reykjavik-on-the-Liffey.
All this is doubtless true. But if the euro is so successful, why is it unlikely to emerge from the economic crisis with an enhanced status in the global monetary order? This is a question asked, and answered very convincingly, in a new book, The Euro at Ten: The Next Global Currency?
“It is revealing that even in the midst of the worst financial crisis in 70 years, one widely and somewhat justifiably believed to have begun in the US economy and resulting from US policy mistakes, the flight to safety of world savings was to US treasuries, and not noticeably to the euro,” say the book’s authors.
They make four main points. First, the US has highly integrated financial markets, whilst those in Europe are fragmented. European banking and financial supervision is under national control. There is no single market for government bonds.
Secondly, the eurozone lacks the right rules and tools of governance. It does not have effective representation at global level in forums such as the International Monetary Fund. The area’s response to last year’s emergency in the financial sector was, to begin with, feeble and driven by national considerations. When it finally came up with some answers in October, the measures took the form of “ad hoc co-operation rather than of institutionalised co-ordination”.
Thirdly, eurozone governments have failed to make the euro an anchor of regional stability in eastern Europe. The crisis has made most EU countries outside the eurozone more eager than ever to adopt the euro, but eurozone leaders have rebuffed them.
Lastly – and, in my view, this is the killer argument – the size of the eurozone economy looks certain, in coming years, to shrink relative to the rest of the world. East Asia, the Gulf states and Latin America are all studying the possibility of regional monetary integration. That would leave the euro as a regional currency for Europe and not much more. China is calling for a new reserve currency to replace the dollar, but it’s certainly not thinking of the euro.
“There is no question this year will be a stress test for the European single currency,” Joaquín Almunia, the EU’s monetary affairs commissioner, said last week.
He was right – but the longer-term question is whether the euro’s international role is doomed to be permanently limited.
Across the globe: Gideon Rachman and his FT colleagues debate international affairs on