Twenty years later, the euro still dreams of rivaling the dollar

When millions of Europeans in 12 countries exchanged lira, francs or pesetas for the common currency of the euro, the then French president Jacques Chirac assured that Europe was “reclaiming its identity and its power.”

For the most enthusiastic promoters of the single currency, the euro was not only a hopeful step for European unity, but it established a rivalry with the United States and the almighty dollar.

The dollar continues to rule

But 20 years later, it is beyond doubt that the dollar reigns overwhelmingly as an international safe haven currency.

When the spread of coronavirus the global economy shut down, the value of the dollar soared as investors flocked to the safety of the de facto global currency.

More than US $ 2.1 trillion is in circulation today and about 60% of the foreign exchange reserves of central banks are in dollars.

The euro share is around 20%, according to the Banco Central Europeo (ECB).

But even if it does not pose a direct threat to the hegemony of the greenback, the single European currency is a respectable contender.

German model

The euro is the son of a painful compromise between the two engines of the European Union (EU): Germany abandoned its beloved framework in exchange for France supporting German reunification after the fall of the Berlin Wall.

Initially, the ECB’s rules on the euro took a distinctly German line in which stability and avoiding inflation were the only priority.

Making the euro a leading international currency “may have been the French vision, but it certainly wasn’t that of the German public,” said Guntram Wolff, director of Bruegel, an economic think tank in Brussels.

“When the ECB started operating, it did so on the model of the Bundesbank, which basically means neutral on that issue,” said Wolff.

In any event, the dream was shattered by the eurozone debt crisis. On its 10th anniversary, the euro was fighting for its survival.

Respuesta a Trump

The idea of ​​promoting the euro as a tool of power returned with the arrival of Donald Trump to the White House. When Trump abandoned the Iran nuclear deal, companies that had invested in that country were threatened by US retaliation.

The European Union prepared a legal strategy to keep European firms away from possible sanctions from Washington, but the plan failed because companies trembled at the idea of ​​defying Uncle Sam and the broad reach of the dollar.

Annoyed, European leaders called on the European Commission to work on ways to compensate for the use of the dollar as a weapon. The executive body presented some ideas in January, but not a legislative proposal.

Disagreements

A European official familiar with the debate assured that, with the departure of Trump, the issue lost importance. And in any case, “when you talk about the international role of the euro, you talk about everything and nothing at the same time.”

“Everyone agrees with the principle that the euro has a greater role in the world, but where disagreements arise is how to get there,” he said.

Most agree that the missing magic ingredient is a safe asset, a European equivalent to US Treasuries that since World War II have been investors’ global haven from stormy markets.

The high demand for European bonds to help pay for the bloc’s huge fund for post-pandemic recovery has further strengthened this argument.

But this question is off the table for countries such as Germany or the Netherlands, which fear that they will end up paying off loans that benefit indebted states such as France, Spain or Greece.

For Wolff, from the Bruegel institute, it cannot be argued that a Eurobond would “help”. But the best thing for the euro would be a productive economy, he said.

“If you have a dynamic economy, international investment will come to Europe and strengthen the euro as a currency,” he defended.