Euro pipe dream holds no currency

Over the next 10 years, it will become the global currency of choice. Central banks will be stockpiling it in their vaults. Oil will be priced in it. So will gold and most other commodities, while traders will make it their default option for every deal. You might think we are talking about China’s yuan, or Bitcoin, or some whizzy new blockchain token. But according to Jean-claude Juncker, that is what is ahead for the euro.

In his State of the Union address this week, the President of the European Commission argued that the euro should replace the dollar as the world’s reserve currency, with a plan promised by the end of the year.

The euro? For real? In fact, it has been declining steadily in its share of global reserves. There is more chance of the Iraqi dinar taking over the world. In truth, by reheating that tired rhetoric all the EU’S leaders are doing is demonstrating how far from reality they keep travelling.

Challenging what the former French president Valéry Giscard d’estaing once described as the “exorbitant privilege” of the dollar has long been an ambition of Europe’s committed federalists. Controlling the world’s reserve currency not only helped the American economy, they argued. It solidified that country’s dominance of world trade. Replacing it was one of the explicit goals behind the creation of the single currency. The eurozone, with a larger population and equal economic weight to the US, would usurp the dollar’s role, and get all the economic advantages that came with it.

Juncker was banging that drum with renewed vigour this week. “It is absurd that Europe pays for 80pc of its energy import bill – worth €300bn a year – in US dollars when only roughly 2pc of our energy imports come from the United States,” he complained. “It is absurd that European companies buy European planes in dollars instead of euro. This is why, before the end of the year, the Commission will present initiatives to strengthen the international role of the euro.

“The euro must become the face and the instrument of a new, more sovereign Europe”.

We will see by Christmas what the plan is. One thing is certain, however. It has a heck of a long way to go. A report this summer from the European Central Bank – hardly a biased source – admitted that far from growing in importance, the euro is actually shrinking. Soon after the currency was launched in 1999, it accounted for 20pc of global reserves. By 2003/4, it was getting up close to 25pc. But after that, it stalled and then went into reverse. By last year, the euro accounted for just 19.9pc of global reserves, the lowest level since launch, and this year it showed no significant improvement. It has fallen by three percentage points since 2009. On other measures, such as share of international loans or global deposits it is declining as well, the ECB says.

Indeed, it doesn’t appear to be any more significant than the currencies it replaced. Back in 1990 and 1991, according to Bundesbank data, the German Deutschmark by itself accounted for 19pc of global reserves (although it fell back to a more normal 14.5pc by 1996, after a few tens of billions were blown trying to defend the ill-fated Exchange Rate Mechanism). That is about where the euro is now. Even the old French franc accounted for 2.4pc of global reserves in the Nineties. The euro is smaller than the combined share of the currencies it replaced. Instead of enhancing Europe’s role in the global monetary system, it has diminished it.

The reasons for that are not exactly hard to work out. Sure, it has been patched up in the last few years. But the euro came close to collapse in the last crisis and may easily do so again in the next.

The dollar faces serious challenges. Under an erratic president, it is abdicating global leadership. Even with robust growth this year, its share of global GDP is in relentless decline. Over the next decade, Bitcoin may overtake it. So might the Chinese yuan. Or some version of blockchain technology that Amazon or Apple are working on. But the euro? Forget it. All Juncker was doing was demonstrating that he lives in a rhetorical bubble – and is getting more detached from reality all the time.

‘Far from growing in importance, the euro is actually shrinking in stature’