The U.S. dollar is taking a beating. I’m not just referring to its exchange rate, but also to the growing doubts being raised about the role the greenback plays on the global stage as the de facto world currency.
That, according to Christine Lagarde, President of the European Central Bank (ECB), creates an opportunity for the euro to step into the spotlight as a possible (partial) alternative to the buck. In doing so, the eurozone could claim some of the privileges that come with being a global currency—think lower interest rates or protection from exchange rate fluctuations.
But earning that status doesn’t happen automatically, Lagarde admitted—you have to work for it. And she’s right; nothing comes easy.
So what needs to be done? More free trade agreements, deeper capital markets, and a de facto political union within the EU. Lagarde has spoken about scrapping the veto right and issuing large-scale joint debt—so-called eurobonds—which would eventually require the establishment of an EU Ministry of Finance.
With that last point, we’re clearly hearing politician Lagarde, not ECB President Lagarde. And that’s a serious problem. In fact, it’s a sign that the euro is not yet ready to challenge the dollar. What’s more, the currency’s continued existence is not even guaranteed in the medium term. Yes, it’s been around for over 25 years. But in the lifespan of a currency, that’s just a blink of an eye and says nothing about long-term viability.
One of the most critical ingredients for any currency that aspires to global status, as the euro apparently does, is the presence of a strong and stable central bank. That’s a lesson the history of the dollar teaches us very clearly.
A strong and stable central bank inspires international confidence in its currency. It is one that operates independently from politics, focuses on monetary policy, and does that job well.
Meanwhile, the ECB President is walking hand in hand with the President of the European Commission. That hardly paints a picture of an independent institution, to put it mildly. The ECB has become involved in all sorts of things that fall outside monetary policy: climate policy, and—as Lagarde’s speech illustrated—political and institutional design of the European Union. At the same time, the bank has been failing for quite some time to meet its monetary objective of price stability.
It’s no coincidence that surveys consistently show even ECB staff themselves are losing confidence in the institution. Why the rest of the world should have more faith in the Frankfurt-based bank is beyond me.
That Lagarde, a Frenchwoman, is pushing for the euro to challenge the dollar is something the economic historian in me can’t view separately from France’s long-standing desire to undercut the United States in this arena. The role of the dollar has been a thorn in France’s side for decades. When the U.S. government broke the link between the dollar and gold in 1971 to stop the outflow of gold—because many foreign governments were exchanging dollars for gold—guess which country started that trend? You get three guesses.
The ECB’s political activism alone is proof the euro isn’t ready. This kind of behavior is exactly what the guardian of a would-be global currency should not exhibit. But this is what you get when a career politician is appointed president of a central bank.
Finally, an anecdote that, in my view, perfectly illustrates how far the euro still has to go before it can challenge the dollar’s global role.
I recently read a book in which two Bosnians, my fellow countrymen, travel the Silk Road in search of traces of Bosnian soldiers, diplomats, politicians, and traders. Along the way, they stopped at a gas station in Saudi Arabia to refuel. When they tried to pay, the attendant would only accept Saudi riyals or U.S. dollars. The two didn’t have enough dollars and offered euros instead. The attendant threatened to beat them and called the police! He was convinced it was fake money—banknotes from a currency that didn’t exist. Only when the police arrived did he believe the euro banknotes were real money. After a quarter century of existence, it seems not everyone is even aware of the euro’s existence, let alone trusts it widely outside the eurozone.
Can the euro challenge the dollar? Absolutely! Sometime around 2050—if the euro countries start now with responsible, confidence-inspiring policies, maintain that course, and the ECB radically transforms itself into a real central bank. I’m not convinced the chances of that happening are greater than the chances the euro won’t even make it to 2050.
Edin Mujagić is an economist, manager of the Hoofbosch Investment Fund, and author of the book Keerpunt 1971. He writes a monthly ECB Watch column on the monetary policy of the European Central Bank for Investment Officer.