The Guardian view on the euro crisis: the triumph of experience over hope
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Version 0 of 1. “Great powers have great currencies” goes the aphorism of Robert Mundell, the Nobel prize-winning political economist. Sure enough, one of the easiest guides to power is to check which currency is most widely accepted around the world. When Britannia ruled the waves, pound sterling ruled the foreign exchanges, while the long “American century” has been papered in greenbacks. Millennia before the iron age of Jean-Claude Juncker and Martin Schulz, Athens enjoyed a golden age – and so did the silver drachma. At its birth in 2000, the euro was garlanded with predictions by Mr Mundell and other eminent economists that it would soon challenge the dollar for global dominance. One of Bill Clinton’s top economic advisers, Jeffrey Frankel, went so far as to co-author a forecast that the euro would overtake the dollar as the world’s top currency … by as early as 2015. This is about more than a league table. As home of the dollar, the US enjoys what has been called an “exorbitant privilege”. Washington can borrow, even at times of crisis, far more easily and cheaply than its competitors. A great currency makes it easier to finance the role of a great power. It also confirms that status. If money talks, it is scarcely more eloquent than when Saddam Hussein redenominated Iraq’s oil exports in euros, rather than dollars (“the currency of the enemy”), or Beijing picked London as a hub for trading the renminbi. When Jacques Delors, the former European commission head, claimed at its inception, “The little euro will become big”, no one quibbled. How could it not? Europe was expanding east and Washington’s “unipolar moment” was drawing to a close. The idea of a monetary union without political union was novel, but it fitted contemporary scepticism of the nation state as an “imagined community” – not to mention the belief of technocrats that budgetary rules could trump political norms. The latest Greek debacle merely confirms what has long been evident: the euro is not going to knock the dollar off its perch. Sure, it will be the money of a vast trading area of 340 million people, with a GDP almost seven times that of the UK, the notes and coins of hordes of sunburnt holidaymakers. But the number one reserve currency? For central banks and corporate treasury departments the world over that will remain the dollar. As the political economist Benjamin Cohen observes in his new book, Currency Power, while nearly 34% of international bond sales were denominated in euros in 2005, that proportion has now slumped to about 25%, while the share of dollar-denominated bonds in international markets has jumped from 43% to well over 50%. Yet both the eurozone and the US are struggling to recover from a massive banking crisis. Both are collections of different states that simply trade in a common currency. So why is the euro an also-ran? Mr Cohen argues that it lacks the architecture to ensure a stable currency union. In the 150 years between Alexander Hamilton and Franklin Roosevelt, the US developed three key features: a system of financial transfers (such as unemployment insurance and food stamps) between the federal government and its 50 states; limits on the deficits that could be run up by any state; and a refusal to take on bankrupt states’ debts. The eurozone has imposed a series of rules on its members’ borrowing – but they have been broken not just by Greece, but by Germany and France, too. It has gone in for bodged bailouts and pretend bailouts where no hard cash was on the table. And the countries with real clout will not entertain the possibility of any fiscal union to complement the monetary union – despite the urging of the IMF, among others. Proving how crucial that last point is, another Nobel prize-winner, Paul Krugman, compares Florida with Spain. In the past few years, both states have had epic housing busts. But while Florida could count on Washington to dole out huge sums in aid, Spain had to bear all the costs of its meltdown alone, which resulted in financial crisis and drastic austerity. When economists speculate about the possibility of European fiscal union, they mean nothing less than some pooling of tax and spending across the 19 members of the eurozone. Implied in that is a form of political union – which in turn requires an acceptance of some common interest and purpose across all these disparate electorates. That looks less likely than ever, with the German press attacking the Greeks and vice versa. But if the eurozone is ever to pose a serious threat to US dominance, it has to have not only sound economics but a coherent politics. |