September 13, 2018
Bravo Mr Juncker for raising the issue of the euro’s international role. But what now?
As FAZ notes, Jean-Claude Juncker’s state of the union address was a sentimental good-bye, not an action plan. He focused on the international role of the euro more than on institutional reform, although pointing out that the two are linked. We note that the debate on institutional and policy reforms of the eurozone still rages on in academic circles, but has almost died at the policy level.
We think Juncker is right to reframe the debate in this way. The foreign policy aspect is the more important one - and the most promising avenue advocates of eurozone reform have right now. The case for a stronger international role of the euro is easy to make. Nobody wants to be dependent on Donald Trump. But for that to happen, the eurozone needs to work very differently from the way it works today.
Juncker did not go into any details. We doubt the European Commission has developed a strategy. The subject straddles two rather different departments - economics and foreign policy. We note that EU foreign policy wonks and macroeconomists have shown very little interest in the international role of the euro. But we also note that politicians are beginning to take an interest in this issue - Heiko Maas, the German foreign minister, talked about it recently, and Juncker did yesterday.
What the comments of Maas and Juncker have in common is that they both recognise the importance of the topic, but they have not thought it through. Maas’ focused on the Swift system, which is a payment information system. It constitutes an important institutional link in the global financial system, but America’s exorbitant privilege is not really the result of its de-facto influence over Swift but of the dominant role of US financial markets. Juncker’s comments also appeared a little off when he said that it was absurd for the EU to pay 80% of its energy import bill in dollars, or that EU airlines pay in dollars to buy EU-made planes. The invoicing currency is an issue but not the main issue.
A stronger international role of the euro will require a single safe asset, by which we mean an asset with a sufficiently strong mutualised tranche. A CDO or similarly constructed cheating devices are not going to do the job. A stronger role for the euro also requires that the eurozone stops targeting competitiveness and reduces its structural current account surplus. We do not agree with the conventional view that the dollar’s dominance is due mainly to the US’ willingness to run large and permanent deficits. The story is more complicated. But large and permanent surpluses are not consistent with a dominant international role either. You can’t dump your savings surpluses on the rest of the world and expect your currency to be the international anchor.
But we are encouraged that top EU politicians are at last beginning to pick up this theme - one they ignored during the first twenty years of the euro. If you are serious about eurozone reforms, this is how you do it. European member states with their different historical experiences of economic policy will never agree sufficient institutional reforms. But the threat posed by the US and China is symmetric, and they all have an interest in making the EU more robust.