Blog post

Why the Euro Is Not the Next Global Currency

Publishing date
17 October 2010

Bruegel Director Jean Pisani-Ferry and Adam Posen, Member of the Monetary Policy Committee for the Bank of England and Bruegel Board Member, explain why the euro has not been favored as a global currency even as the dollar's dominance of the world currency markets has been met with widespread criticism. The authors point out that the euro has failed to gain special status due to "self-imposed limits on usage and adoption abroad," such as strict adherance to both ERM-II exchange rate stability requirements and to the Maastrict criteria for euro entry. Having a wider role for the euro, they argue, would be better for both the global community and the eurozone.

The explosion of debate on the demise of the dollar has been instructive, though vastly premature. What is striking, however, is the absence of the euro from talk of alternatives as the global currency. Currency baskets, SDRs, even internationalisation of the renminbi, have been mooted, but not the obvious alternative.
This should have been the euro’s moment. It is already the second global currency. The gap between the overwhelming role of the dollar and the size of the US economy has long been recognised. The crisis is accelerating the fall of the US share of global gross domestic product and the apparent neglect of fiscal sustainability is eroding the dollar’s relative attractiveness for the longer term.
Over its 10 years, the euro has been a huge success for its member states. Its attractiveness in the economic storm has never been higher to European Union members and neighbouring economies. Momentary currency appreciation aside, however, there is no sign of a move to the euro as a global currency. The share of dollars in global reserves remains almost three times that of euros. During the worst of the crisis, dollars were demanded by institutions in trouble and it was the US Fed that provided up to $600bn in liquidity to non-US residents through swap lines. Nothing of this sort happened with the euro. It is a huge success in Europe, but it remains a regional currency.
There is speculation about pricing oil in something other than dollars, but no evidence of that across the range of traded goods invoiced in dollars – and certainly no switch into the euro. Companies trading goods outside the immediate euro region rely on dollars as the invoicing and settlement currency, reflecting inertia, but also liquidity, availability and legal clarity. No economies seem to be leaving dollar pegs for the euro.
One reason for this is that the euro has not overcome its own self-imposed limits on usage and adoption abroad. By strictly maintaining the ERM-II exchange rate stability requirements and the Maastricht deficit, inflation and interest rate criteria for euro area entry, it has kept new applicants at a distance. By discouraging euroisation and unilateral pegging to the euro – even in its neighbourhood – it has widened the gap. By channelling the response to the crisis in eastern Europe through the International Monetary Fund it has reinforced the defensive view that stability for the euro area is fragile if extended.
This lack of leadership is a shame because the alternatives when the dollar’s role recedes are worse. Baskets are notoriously hard to make work, especially if they include an inconvertible currency. Their stability is also in doubt as they rely on uncertain political agreements. As to the SDR, it is not a real currency either.
It would be better to have a period of co-dominance between currencies, allowing for a smooth transition to a multi-currency regime. This happened between sterling and the dollar, although the unwillingness of the US government to ease this process in the 1920s and 1930s led to a leadership vacuum and financial instability. We fear the euro area’s reticence to take on a global currency role could lead to similar instability in the future.
In fact, the measures needed to secure the euro’s wider role are in the area’s own economic and political interest. Financial integration should be completed and underpinned by solid European supervision; second, the economic governance of the EMU should be strengthened, especially as regards crisis management; third, the euro area should adopt a more proactive strategy to enlargement and stand ready to provide liquidity support to partner countries where its currency is used; fourth, it should strengthen its economic base by raising the rate of sustainable growth.
Does this sound familiar? It is no accident: limitations on the euro area’s productivity, openness and governance are also the factors that limit the euro’s global role. By dodging some of its duties as a regional currency, the euro area constrains the euro’s wider adoption globally. The absence of the euro from talk of dollar alternatives shows that these internal failures also put at risk future monetary stability for the broader world.

Jean Pisani-Ferry is director of Bruegel, an International Economic think-tank in Brussels. Adam Posen is senior fellow at the Peterson Institute for International Economics. They are editors of The Euro at 10: The Next Global Currency? (Bruegel/PIIE, 2009)

The piece was also published in the Financial Times and in Financial Times Deutschland.

About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

  • Adam Posen

    Adam S. Posen is the president of the Peterson Institute for International
    Economics.

    Adam Posen is President of the Peterson Institute for International Economics. From 2009-12, during the global financial crisis, he served as an external voting member of the Bank of England’s Monetary Policy Committee, and was a globally recognized advocate of activist macroeconomic policy response to the crisis. He is the author or editor of six books, and has served as a visiting scholar or consultant to central banks throughout Europe, North America, and East Asia. He is in his fifth term as an Economic Advisor to the US Congressional Budget Office. He received his PhD in Political Economy from Harvard University, and has been the recipient of fellowships and major research grants from the European Commission, the Ford Foundation, the Sloan Foundation, and the US National Science Foundation.

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