Since the euro crisis began, the euro zone, like a terminally ill patient, has had its bad phases and its bearable phases. With this month’s bank failures in Spain and the election results in Greece and France, it has entered into a very bad period. More than at any time since the crisis began, world financial and political leaders are openly speculating whether Europe’s common currency has now begun a death spiral. Contrary to liberal media coverage of this potential death watch, dissolution of the euro is in America’s medium- and long-term interest.
In recent decades a bipartisan U.S. movement has championed the virtues of global economic competition. So far, the result for Americans has been a mixed bag. On the plus side, it has helped keep U.S. inflation and interest rates low, while letting Americans enjoy a lot of reasonably good quality Chinese consumer products. On the minus side, globalization has gutted American manufacturing, suppressed income growth and caused massive trade deficits. The U.S. is now the world’s largest debtor country, a politically disadvantageous position vis-à-vis its creditor nations.
For now, the U.S. has hung on to its greatest political and economic advantage; the dollar continues to be the leading global reserve currency. This is hugely important. If the global economic competition were a poker game, it would be as if the U.S. is playing with five aces up its sleeve. The dollar’s privileged position helps America maintain price stability, low interest rates and virtually unlimited liquidity.
The dollar became the world’s sole global reserve currency after World War II by virtue of the fact that it won the war and then played a dominant role in putting the world’s economy back together again. Sadly, many American policy makers don’t understand that it’s not America’s birthright to control the global reserve currency. Rather it’s a privilege that has to be earned every day through transparent liquid markets, a strong and stable legal frame work, and a Federal Reserve Bank that will not debase the currency with gimmicks like quantitative easing and zero interest rate policies which hurt creditors and savers.
For decades, other countries have resented the advantages that the dollar gives America. Russia, China and the Europeans have been continuously exploring ways to develop alternative global reserve currencies. Early examples were the ruble in the Warsaw Pact countries, and the IMF’s SDR (Special Drawing Rights).
But the first credible threat to the dollar is the euro. In fact, throughout the euro zone crisis beginning in 2010, the euro has behaved like a global reserve currency. This is why the euro continues to perform well on the global foreign exchange markets, a fact that has confounded many analysts whose models suggest it should have collapsed much earlier in the crisis.
Clearly, in the global economic competition, the dissolution of the euro would be a great benefit for the U.S. As in sports competition, the U.S. should take advantage of its competitor’s turnovers and unforced errors, with no apologies and no guilt.
In his recent New York Times essay “Apocalypse fairly soon” Paul Krugman claims there is only one solution for rescuing the euro. His solution is a set of measures that would require Germany to agree to inflation of greater than 4%, among other bitter medicine. Krugman, a leading liberal economist, concludes by declaring that we should hope that Europe will rise to the occasion and save the euro.
To the contrary, we Americans should hope it doesn’t. Although there would be some short term negative ripple effects on the U.S. economy, it will be manageable. U.S. business and financial institutions have been preparing for the potential euro dissolution for two years. Further, in the event of euro dissolution, the European Union will certainly continue as a free trade bloc. The UK wouldn’t shed many tears either. It has always argued for limiting the EU to a free trade bloc structure.
It’s worth noting that in the U.S., many liberals and Democratic operatives are very concerned about the risk of dissolution of the euro in the coming months. They believe it could add just enough domestic economic disruption to drive the final nail into the coffin of President Obama’s reelection campaign. Many conservatives argue that such an outcome would also be good for the dollar.
Simply put, the sky will not fall if the euro falls; but, the dollar would be left standing once again as the undisputed almighty global reserve currency.