Who's Afraid Of The Euro ?
I once attended a conference at which a senior Japanese official made
an impassioned speech about the need to establish the yen as an international
reserve currency. When my turn came, I explained that this was silly; even
if the yen did become a reserve currency, it would make virtually no difference
to Japan or to anyone else. At the end of the session, the moderator thanked
me for my contribution--which, he said, emphasized once again the crucial
importance of the yen's role as a reserve currency. I never figured out
whether this was a case of the translator having trouble with my accent,
or whether it was a polite way of telling me I had said something unacceptable.
But I do know that people almost always attach far more importance to the
issue of reserve currencies--the role of the dollar and its rivals in international
trade and finance- -than the subject deserves.
And so it was inevitable that the coming of the euro --the common European
currency that seems set to be introduced next year, and that may eventually
challenge the dollar's dominance--would inspire irrational fear. Sure enough,
a few weeks ago the intellectual fashion victims at one of those other
business magazines ran an editorial entitled "The euro makes trade a new
game." "Thanks to the dollar's role as reserve currency in world financial
markets," they opined, "the U.S. has been able to do what no other country
can-- consistently import more goods than it exports.... The U.S. owes
some $5 trillion to dollar holders abroad, thanks to three decades of trade
deficits." Gosh, what happens if those people switch to euros?
Well, not to worry. It just isn't true that America's ability to import
more than it exports is unique. Since 1980 the U.S. current- account deficit
(which includes services and investment income as well as goods) has averaged
1.5% of GDP. That's about the same as Britain's average, less than Canada's
2.2%, and nothing like Australia's 4.2%. These countries paid for their
excess imports the same way we did: by selling foreigners stocks, bonds,
real estate, and so on. The only difference is that because their deficits
were bigger, their debts are also bigger as a share of GDP. Ours, it turns
out, aren't that large--at least on a net basis. While it's true we owe
foreigners about $5 trillion, they owe us more than $4 trillion; the difference
is about $800 billion, or 10% of GDP.
But doesn't the dollar's special role give us some advantage? Most of
the international role of the dollar comes from its use as a "unit of account"--the
measuring stick for international business. When a Japanese refiner buys
Kuwaiti oil, say, the contracts are in dollars. This is a testament to
U.S. economic influence, but flattery aside, it's hard to see what we get
out of it.
What about our ability to borrow in dollars, to sell dollar- denominated
bonds to foreigners? Hey, other countries do that too. But our debts are
in our own currency! So? We still pay interest on them. True, we could
inflate away our foreign debt. But we won't--and if investors thought we
would, they would demand higher interest rates.
Well, then, you may say, surely the international role of the dollar
forces people out there to hold dollars for transaction purposes. Yes,
but not so you'd notice. When Daewoo repays a dollar loan from Sanwa, it
writes a check on its account with some international bank. True, that
bank itself surely maintains an account in New York, backed in part by
non-interest-bearing reserves held at the Fed. So the U.S. does in effect
get a zero-interest loan out of the dollar's international role--but it
probably amounts to only a few billion dollars, small change for an $8
Where the U.S. does get a significant free ride is from the willingness
of foreigners to accept our currency--actual bills. Foreigners hold more
than $200 billion of American money. Guess what kind of business requires
payments of large sums in cash, by people unconstrained by official restrictions
on possession of foreign exchange? That's right: the dollar is the world's
premier medium of illicit exchange. Every year the U.S. ships foreigners
$15 billion in cash (about 0.2% of GDP), and gets real goods and services
in return. Better not ask what kind.
So the threat to the U.S. from the rise of the euro is this: five years from now, when wise guys in Vladivostok make offers you can't refuse, the payoffs may be in 100- euro notes instead of $100 bills. The loss of such business might cost the U.S. economy as much as 0.1% of GDP. Somehow, I think we can live with that.