A BIGGER ROLE FOR THE EURO WOULD BENEFIT THE U.S. TOO / THE WALL STREET JOURNAL

A Bigger Role for the Euro Would Benefit the U.S. Too

Europe wants the euro to become a reserve currency but it faces big challenges

By Paul J. Davies

European Union leaders have had enough: They want the euro to become a truly global currency for trade, like the dollar.

New policies published this week by Brussels with the aim of displacing the greenback as the world’s only reserve currency would benefit investors across the world, including in the U.S. It is a shame they face big obstacles—notably German-led fears of government debt and trade deficits.

The latest efforts to promote the euro are focused on trade and investment in energy and resources. European leaders are partly trying to protect companies and banks from new U.S. sanctions against Iran by helping them avoid using dollars.

But even if these narrow policies work, the euro will struggle to develop a bigger role. A reserve currency must be useful for trade far beyond the issuing country. About 80% of global imports billed in dollars never touch the U.S. 
For everyone to trade in dollars, they must be able to store them for future use, explains the historian Adam Tooze and economist Christian Odendahl in a paper for the Centre for European Reform. That means finding safe dollar assets, such as government bonds or other bonds with high credit ratings. Demand for these lowers financing costs for anyone borrowing in dollars.
For the euro this is a problem. There are few safe euro assets and their supply is shrinking, thanks in large part to the tight-budget policies Germany has championed across the eurozone in recent years.



The headquarters of the European Central Bank in Frankfurt, Germany. The latest efforts to promote the euro are focused on trade and investment in energy and resources. Photo: kai pfaffenbach/Reuters 


To make the euro a reserve currency, Europe would have to get more comfortable with borrowing. And it would also have to deal with a more highly valued currency and its impact on Germany’s export champions.

Dollar dominance is a problem for the U.S., too. Even with trillions outstanding in U.S. Treasurys and bonds from entities like Fannie Mae ,there aren’t enough safe dollar assets. That has driven financial engineers to create pseudo-safe assets by pooling riskier debt: subprime mortgages before the crisis, for example, or loans to highly indebted, private-equity owned companies today.

In a more balanced world with two reserve currencies—the euro and the dollar—the demand for safe assets could be shared and the need for financial alchemy diminished. That should mean fewer crazy debt booms in the U.S. It would also lessen the burden on the U.S. of being the borrower and consumer of last resort for the world’s economy, Mr. Odendahl says.

The eurozone’s economic philosophy needs to change if the euro is to take on a more global role. The U.S. should firmly encourage this: It too stands to benefit.