mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Smart Developing Economies Dump the Euro

They say a picture is worth a thousand words. Here’s the latest picture, derived from the IMF’s Currency Composition of Official Foreign Exchange Reserves database:Forex Reserves of Emerging Economies

The dollar was supposed to be doomed by the might of a single European currency, but the developing world’s central bankers are backing away. They have shed €45 billion from their holdings in 2012, continuing a trend that started in 2011.

The FT has done the spadework, interviewing the currency watchers:

“It’ll be the number two international currency but I wouldn’t say there are any prospects of it challenging the dollar,” said Jeffrey Frankel, professor of economics at Harvard’s Kennedy School of Government. […]

“The degree of integration across European financial markets has taken a step back,” Mr Frankel said. “That is the dimension on which the euro has lost ground in international currency status.”

The euro may regain its allure if Europe moves towards fiscal union and a single sovereign bond market. But its moment may have passed as big shifts in the global economy boost new emerging market currencies that will challenge both the euro and the dollar.

“The effects of the euro crisis will linger, growth will be slow, interest rates will remain low, and the general attractiveness of euro assets low,” said Edwin Truman, senior fellow at the Peterson Institute think-tank in Washington. “The dollar is holding its own for now, and we are moving towards a multicurrency system.”

That all sounds right to us. Europe’s sovereign debt crisis is anything but over. Southern countries are sputtering under imposed austerity even as Germany and the north demand ever harsher concessions for the next round of bailouts. How this breaks is anybody’s guess, but a recipe for growth this is not. The Eurozone as it’s now configured does not augur a bright future for the countries in its fetters. If and when the Europeans get their acts together, we’re likely to be living in a very different world.

Features Icon
show comments
  • ojfl

    It seems from this reader the debt crisis in Europe does not have a solution within the current parameters of the EU. Either they will have to dissolve the Euro or the people will demand they do so.

    • Philopoemen

      I agree; it seems hopeless at this point.

      I think I still have some Italian Lire laying around somewhere. Maybe I’ll get to use them after all.

  • Mark Michael

    I’m going to stick with my contrarian laissez-faire opinion: the CB’s are switching from what appears to be one Titanic to a slightly more waterproof 2nd Titanic. Or to switch metaphors, picking the taller of the only 2 midgets in the room. The “real” problem (as if I know!) is the political elite on both sides of the Atlantic and their addiction to political power and urge to dominate too much of the economic life of their areas. What others cite as reasons for despair about either area and their currencies, I see as a glimmer of hope: (1) Tea Party support in the US and (2) finally forcing European sovereign debt to be more (crudely, admittedly) closely managed/taken responsibility for locally. In other words, the ones who created the problem should, where practical, bear the burden of the problem’s consequences. Poor little Cyprus got the crude brunt of this first “signal” to the investors, bankers, very large depositors in the banking system within the EU. Very savvy types will quietly note (hopefully! Boy, am I naive or what!) and begin adjusting their economic behavior.

    Fiat currencies, floating rate exchanges, are the epitome of irresponsible behavior in my bizarre worldview. They automatically force the entire country to pay the price for what nearly always is the bad behavior of a tiny number of elite. (Yeah, I know the voters elect the pols. But in my bizarre world, only highly moral people should ever run for elected office. They should then swear an oath to uphold the Constitution, the Rule of Law, treat everyone equally. In that strange world, central bankers would actually monitor the riskiness of the banks within their system, call them out long before they create subprime mortgage bubbles, MBSs. Etc.)

  • Luke Lea

    Keep in mind that a “strong” dollar is not necessarily a good thing. It is an essential ingredient in America’s out-sized trade deficits with the rest of the world, which not only reduces American manufacturing (including manufacturing employment) but has resulted in our becoming the most highly indebted nation in the world.

    Too bad the word “strong” has macho connotations since a strong currency can undermine the industrial strength of a nation.

    • Christopher Anderson

      Why is a current account deficit a bad thing? Isn’t it by definition a capital account surplus?

  • Atanu Maulik

    If the history of the world over the past 200 yrs has taught us one thing it is this : You do not bet against the United States of America.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service