Euro v USD as premier currency
Posted by Dave Bath on 2008-03-18
Another must-read cracking VoxEU post by Harvard Economics Prof Jeffrey Frankel, which discusses how the US dollar overtook the UK Pound just after the war, and why the Euro will overtake the US dollar as the premier international currency. "The euro could surpass the dollar within ten years" (2008-03-18) and a companion paper "The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency" (2008-02-13).
The VoxEU post is great in that it looks at the political implications of the change, including the increasing mistrust of US foreign policy…
In the past, US deficits have been manageable because allies have been willing to pay a financial price to support American global leadership; they correctly have seen it to be in their interests…. America has lost popular sympathy and political support in much of the rest of the world. The hegemon has lost its claim to legitimacy in the eyes of many. In sharp contrast to international attitudes at the dawn of the century, opinion surveys report that the US is now viewed unfavourably in most countries. The next time the US asks other central banks to bail out the dollar, will they be as willing to do so as Europe was in the 1960s, or as Japan was in the late 1980s after the Louvre Agreement? I fear not.
Of course, when Asian consumer spending outdoes US consumer spending on Chinese goods, and a decent part of China’s US reserve (trillions) have purchased large chunks of useful assets (like Blackstone’s, Barclays, Rio Tinto, etc), the Chinese would love to screw the US by dumping their stash of dollars, removing the capacity for US military strength to keep escalating.
I’ve argued for some time that Australian governments and companies should write international contracts using baskets of currencies or the Euro for some time. I’m more and more sure of this as each month goes by – although recommend that if you must use only one currency, the Euro makes more sense than anything else.
- It’s worth a quick look at Frankel’s private blog.
- Update: "A long term perspective on the Euro" (VoxEU 2008-04-04):
The euro may surpass the dollar in coming decades to become the leading international currency." This column summarizes four major challenges that the euro must survive for that to come true.