Australian Lefty on Politics, Governance, Science and Info Management

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.

See Also:

  • 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.


3 Responses to “Euro v USD as premier currency”

  1. […] version of the story. All three want to eliminate the bonus.David Bath is persuaded that the Euro will, and should, take over from the US dollar as the preferred currency for nations’ foreign transactions and […]

  2. Raf said

    I think its likely that we will see not just the Eur displace the $ but a more widely traded basket of currencies especially from the BRIC nations (Brazil, Russia, India and China).

    But the Euro is not a one way bet. There are strains within that bloc as well. I heard the Italians struggled to get away a sovereign bond issue recently which is unheard of. Let’s face it there’s plenty of old Bundesbank stalwarts who still shiver at the thought of Italy and Germany joined the the financial hip.

    But its also interesting that the desire for concerted $ intervention no longer seems to be there.

    For Aussies and Kiwis the view may be north rather than north east from now on.

  3. Dave Bath said

    It’s not just “Bundesbank stalwarts” who are worried about the Italians stuffing things up. A year or so back The Economist suggested Italy should be kicked out of the Eurozone and back into the Lira until it got its house in order.

    Baskets make sense, especially if countries took back their sovereignty and defined their own currencies based on a trade-weighted index. That’d make the current crop of currency traders turn to something more useful to do with their money rather than speculate.

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