Analysis .. The failure of the euro in the competition to dominate the dollar saves Europe

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Analysis .. The failure of the euro in the competition to dominate the dollar saves Europe

 

 14 February 2019 02:16 PM

Editing: Noha Al-Nahhas

Mubasher : More than 20 years ago, when the single European currency emerged, the most likely expectation was that the currency would compete against the US dollar on the international reserve currency, but that hope failed to turn into reality.

An analysis of the project publication Project Sindicate shows that the importance of the euro in global reserves and financial markets today is the same as it was two decades ago when the euro was replaced by the German Mark and ten other local currencies.

The European Commission has recently published a document entitled "Towards a stronger global role for the euro." The Commission, like policymakers, believes that the euro zone will benefit if the single currency plays a larger global role, but This is not necessarily true.

One of the presumed benefits is the widespread use of euro currency notes outside the euro zone.

At least according to this measure, the single European currency has a great success. The currency in circulation has more than doubled over the last 20 years, both in terms of absolute value and percentage of GDP of the euro area.

Currently, the total value of the euro is in circulation at 1.2 trillion euros ($ 1.3 trillion). Moreover, it is estimated that much of the euro is used outside the euro area.

But the economics of banknotes have changed. The issue was a profitable business for central banks because they could invest the proceeds in government bonds with a lot of money.

With interest rates at 5% and 1.2 trillion euros in circulation, the ECB could generate revenues of $ 60 billion a year, and despite its small size compared to the euro zone's 10 trillion euro GDP, Half of the EU budget.

But with negative interest rates at the moment, the currency issue is no longer profitable, which is probably one of the reasons why the ECB stopped the EUR 500 currency issue, which is also used to deal with illegal activities, with the fact that providing an easy transaction tool Illegal abroad should not be seen as an advantage of the single European currency.

The other argument about the need to have a global reserve currency is that external borrowing becomes cheaper. This is the "high privilege" described by former French finance minister Valery Giscard d'Estaing as saying that the United States has the advantages of setting the dollar as the main reserve currency In the world.

But while the issue of dollar-denominated debt is an important feature of the United States (the world's largest debtor), the eurozone has a credit center.

With real interest rates rising in terms of dollar value, it would be better for the euro area's external assets to be denominated in dollars than in euros.

Moreover, the consequences of becoming a major fulcrum may be particularly problematic for the euro, and fortunately, countries that link their currency to the euro have a small economic weight.

For example, imagine that China is going to link its currency to the euro instead of the dollar, then the Chinese authorities will decide the exchange rate of the euro against the dollar (the currency of the largest trading partner of the European Union and the rival also), which means that the transformation of the currency can lead to loss of control.

It is true that there are other reasons why it is in Europe's interest for the euro to play a greater global dollar. For example, the application of US sanctions to other countries makes European companies suffer to boost trade with Iran, because most of Iran's international trade is priced in dollars.

But the ability of the United States to apply sanctions broadly is essentially the result of military and diplomatic power. Even if the euro plays a greater role in global finance, the United States will remain in control of the conditions of force.

Having a global reserve currency makes sense for a large economy that is not heavily exposed to the rest of the world. The United States is appropriate, but it makes little sense for a smaller economy such as the euro zone, with goods and services accounting for more than a quarter of gross domestic product.

Moreover, the eurozone's share of the global economy has fallen from 25% when the single European currency has risen to 15% today and soon falls to a 10% low.

Of course, the relative weight of the US economy will decline as China and India continue to grow faster, but the Green Paper will maintain its status as the main currency of global trade as long as China limits capital movements to keep its domestic economy under control.

On the other hand, the euro could increase its global role by slowing the relative decline of its member economies by accelerating growth.

But even assuming that the eurozone continues to fall relative to the global economy, this does not necessarily mean a drop in living standards. Japan's share of global GDP has fallen to half of the past 20 years, while living standards have continued to improve, albeit slowly .

In both cases, it is good that the early hopes that the euro will become a real global currency have not materialized, as the eurozone is currently facing adequate economic challenges without the additional burden of issuing a global reserve currency.