Less than six years ago, as euro notes and coins were launched, politicians sought to champion the new currency. “The euro could become a reserve currency with equal status to the dollar,” said Hans Eichel, then Germany’s finance minister.
Back then the euro was worth less than 90 US cents. This week, as the euro heads towards $1.50, lifted by speculation that the world’s central banks might cut links to the dollar and switch to its younger rival, Europe’s politicians might regret what they had once wished.
The threat to exports from a strengthening euro is sounding alarm bells across the continent, raising concern that the eurozone is bearing an unfair burden of global economic adjustment and that a significant economic slowdown lies ahead.
In spite of politicians’ worries, however, few economists expect that the euro will threaten the dollar’s global role in the foreseeable future. The euro has notched up successes: the value of euro notes in circulation now comfortably exceeds the value of dollar bills and the euro has overtaken the dollar as the main denomination of international debt issues.
But a switch from pricing oil in dollars to euros, as mooted by some, would have largely symbolic significance. More crucially, the dollar still forms by far the largest part of official foreign exchange reserves.
“Nobody knows what will happen in 20 years from now but this process of substituting a leading currency with another one is a long process,” says Otmar Issing, former chief economist at the European Central Bank. “The incumbent always has advantages.”
A greater international role for the euro would reflect logical diversification by central bankers – and could be seen as a tribute to its underlying strengths.
Mr Issing, a former Bundesbank official, recalls how in the 1970s Germany’s central bank was wary about the global status of the D-Mark and the additional responsibilities it felt, but came to change its mind. “As a central bank, it [the currency] is your baby. And if it is so widely appreciated, it is an expression of credibility and trust in the future stability of the currency.”
Will the global attention on the euro create problems for the ECB? Simon Derrick at Bank of New York Mellon dates the start of the currency’s long-term rise to eurozone politicians’ lobbying efforts earlier this decade. Between early 2002 and the second quarter of this year, the euro’s share of known official foreign exchange reserves rose from 19.7 per cent to 25.6 per cent, according to International Monetary Fund figures.
One advantage for the ECB, Mr Derrick argues, is that it has not had to be as aggressive in lifting interest rates – the stronger euro has done its work for it. “But it means that they don’t have the whip hand when it comes to how tight monetary conditions are.”
Still, that would have been true whatever the causes of the euro’s appreciation. Meanwhile, the ECB would argue strongly that, like the US Federal Reserve, it sets monetary policy in the best interests of the geographical region for which it has responsibility.
Talk about the international role of the euro is, anyway, likely to prove inflated, says Holger Schmieding, economist at Bank of America. “Regardless of short-term cyclical fluctuations, the long-term demographic and economic prospects for the US economy and currency are better than for the eurozone. Once the dollar has hit its cyclical bottom, talk of the euro dethroning it will die down.”