Now at last, it seems that the European dream has come true. The dollar is depreciating steadily against the euro as the US is apparently debasing its currency deliberately to ease its burden of debt and resource misallocation. Countries with largely dollar foreign exchange reserves and currency pegs are beginning to question whether the dollar provides the currency stability they desire. The dollar looks set to decline as a reserve currency, and with few other currencies offering the necessary combination of widespread use, deep and reliable financial markets and a trustworthy central bank, the euro is gaining much of the status that the dollar is losing. Talk of countries leaving the euro has receded, and even outside the EU, the euro has been adopted by some countries such as Montenegro, and, despite some government resistance, is gaining ground in Iceland.
But the Europeans are still not happy. Trichet is concerned about "excessive" euro appreciation, while Juncker argues that the euro/dollar exchange rate “does not reflect fundamentals”. President Sarkozy complains that the strengthening euro is a “shock” to France’s economy and for Airbus, a strong euro is “
Unfortunately, sustained euro appreciation is probably an inevitable part of the handover process, as both faith and wealth shift from the dollar to the euro. Moreover, if a driver of the change is
RebelEconomist hopes that Europe chooses hard money (disclosure: although I am British, I do hold a minor but not insignificant fraction of my modest wealth in euros, and no more dollars than a few nickels, whose value is fortunately underpinned more by their metal content than Ben Bernanke). Germany and Japan have shown that it is possible to have a thriving economy with a strong currency. And of course, reserves currency status bestows the exorbitant privilege of cheap capital inflows. Official capital inflows need not be the problem that they became for America, provided they are not used to finance unsustainable consumption. They can be invested to advantage, either in domestic capital stock or foreign financial assets (including Europe’s own foreign exchange reserves in the absence of sufficient private sector saving abroad).