After 20 years, the euro still aims to rival the dollar

When millions of Europeans from 12 countries exchanged lire, francs, or pesetas for the common currency of the euro, then French President Jacques Chirac declared that Europe was “claiming its identity and its power”.

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

Dollar remains in charge

But 20 years later, there is no doubt that the dollar reigns overwhelmingly as an international refuge currency. When the spread of the coronavirus paralyzed the world economy, the value of the dollar soared as investors turned to the safety of the de facto global currency.

More than $2.1 trillion (BRL 11.8 trillion) is now outstanding, and around 60% of central banks’ foreign exchange reserves are in dollars.

The percentage of the euro is close to 20%, according to the ECB (European Central Bank). Still, even if it does not pose a direct threat to the dollar’s hegemony, the European single currency is a respectable competitor.

german model

The euro is the child of a painful compromise between the two engines of the European Union: Germany abandoned its beloved milestone in recognition of France’s support for German reunification after the fall of the Berlin Wall.

At first, the European Central Bank’s rules on the euro followed a distinctly German line, in which stability and avoiding inflation were the only priorities.

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, a Brussels think tank.

“When the ECB started operating, it did it following the Bundesbank model, which basically means being neutral on this issue,” added Wolff.

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

Resposta a Trump

The idea of ​​promoting the euro as an instrument of power resurfaced with the arrival of Donald Trump in the White House. When Trump abandoned the nuclear deal with Iran, companies that had invested in that country were threatened by American reprisals.

The European Union has prepared a legal strategy to keep European companies away from possible Washington sanctions. The plan failed, however, as companies trembled at the idea of ​​challenging Washington and the dollar’s broad reach.

Annoyed, European leaders asked the European Commission to work on ways to offset 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 had lost importance. And anyway, “when you talk about the international role of the euro, you talk about everything and nothing at the same time.”

“Everyone is in agreement with the principle that the euro has a bigger role in the world, but where disagreements arise it’s about how to get there,” he explained.

Most agree that the missing magic ingredient is a safe asset, a European equivalent of the US Treasury bonds that, since World War II, have been a global investor haven in stormy markets.

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

The issue is, however, out of the question for countries like Germany or the Netherlands, who fear ending up paying loans that benefit indebted states like France, Spain, or Greece.

For Wolff, of the Bruegel institute, it is not possible to claim that a Eurobonus would “help”. The best thing for the euro, he says, would be a productive economy.

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