PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS BRUEGEL THE EURO AT TEN: The Next Global Currency? JEAN PISANI-FERRY & ADAM S. POSEN THE EURO AT TEN: The Next Global Currency? Jean Pisani-Ferry and Adam S. Posen, editors Over the !rst ten years of its existence, the euro has proved to be more than a powerful symbol of collective identity. It has provided price stability to previously in"ation-prone countries; it has o#ered a shelter against currency crises; and it has by and large been conducive to budgetary discipline. The eurozone has attracted !ve new members in addition to the initial eleven, and many countries in Europe wish to adopt it. The euro has also been successful internationally. Even though research presented in this volume con!rms that it has not rivaled the dollar’s world currency status, it has certainly become a strong regional currency in Europe and the Mediterranean region. Some countries in the region have de facto adopted it, several peg to it, and many have become at least partially euroized. However, the euro’s impressive !rst decade is likely to be followed by a much more di$cult period. The present !nancial crisis is posing at least two important challenges: real economic adjustment within the euro area and maintenance of !scal and !nancial stability without a central government authority capable of taking appropriate !nancial and !scal decisions in di$cult times. The papers and remarks in this volume demonstrate that the euro has proved to be attractive as a fair weather currency for countries and investors well beyond its borders. But it remains to be seen whether it is equipped to also succeed as a stormy weather currency. CONTRIBUTORS: Joaquín Almunia, Maria Celina Arraes, Leszek Balcerowicz, C. Fred Bergsten, Lorenzo Bini Smaghi, Kristin J. Forbes, Linda S. Goldberg, C. Randall Henning, Mohsin S. Khan, Antonio de Lecea, Erkki Liikanen, Philippe Martin, Thomas Mayer, André Sapir, Dominique Strauss-Kahn, Lawrence H. Summers, and György Szapáry. Jean Pisani-Ferry is director of Bruegel, the Brussels-based think tank, and professor at Université Paris-Dauphine. He is also a member of the European Commission’s Group of Economic Policy Analysis and of the French prime minister’s Council of Economic Analysis. He was executive president of the French prime minister’s Council of Economic Analysis; senior adviser to the French minister of !nance; director of CEPII, the French institute for international economics; and economic adviser with the European Commission. He has held teaching positions with various universities including the Ecole polytechnique in Paris and the Université libre de Bruxelles. Recent books he coauthored or coedited include Coming of Age: Report on the Euro Area (2008), An Agenda for a Growing Europe (2004), and Exchange Rate Policies in Emerging Asian Countries (1999). Adam S. Posen is deputy director of the Peterson Institute for International Economics (PIIE), where he has been a senior fel- low since 1997. He has been a visiting scholar and consultant at central banks worldwide, including on multiple occasions at the Federal Reserve Board, the European Central Bank, and the Deutsche Bundesbank. In 2006 he was on sabbatical leave from PIIE as a Houblon-Norman Senior Fellow at the Bank of England. He is the author of Restoring Japan’s Economic Growth (1998), coau- thor with Ben Bernanke et al. of In!ation Targeting: Lessons from the International Experience (1999), and editor and part-author of The Euro at Five: Ready for a Global Role? (2005) and The Japanese Financial Crisis and its Parallels with U. S. Experience (2000). 1750 Massachusetts Avenue, NW 33 Rue de la Charite Washington, DC 20036–1903 Liefdadigheidsstraat 33 (202) 328-9000 Fax (202) 659-3225 B-1210 Brussels, Belgium www.petersoninstitute.org +32 2 227 4210 +32 2 227 4219 www.bruegel.org THE EURO AT TEN: The Next Global Currency? JEAN PISANI-FERRY & ADAM S. POSEN PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS BRUEGEL Washington, DC June 2009 Jean Pisani-Ferry is director of Bruegel, BRUEGEL the Brussels-based think tank, and profes- 33 Rue de la Charité/Liefdadigheidsstraat 33 sor at Université Paris-Dauphine. He is also B-1210 Brussels, Belgium a member of the European Commission’s Phone: +32 2 227 4210 Group of Economic Policy Analysis and of Fax: +32 2 227 4219 the French prime minister’s Council of Eco- www.bruegel.org nomic Analysis. He was executive president Director of the French prime minister’s Council of Jean Pisani-Ferry, Editor Economic Analysis; senior adviser to the Andrew Fielding, French minister of finance; director of CEPII, Cover design: Susann Luetjen the French institute for international eco- Cover photo: © Stasys Eidiejus—Fotolia.com nomics; and economic adviser with the Eu- ropean Commission. He has held teaching Copyright © 2009 by the Peter G. Peterson positions with various universities includ- Institute for International Economics and ing the Ecole polytechnique in Paris and the Bruegel. All rights reserved. No part of this Université libre de Bruxelles. Recent books book may be reproduced or utilized in any he coauthored or coedited include Coming form or by any means, electronic or mechan- of Age: Report on the Euro Area (2008), An ical, including photocopying, recording, or Agenda for a Growing Europe (2004), and Ex- by information storage or retrieval system, change Rate Policies in Emerging Asian Coun- without permission from the Institute. tries (1999). For reprints/permission to photocopy Adam S. Posen is deputy director of the Pe- please contact the APS customer service terson Institute for International Economics department at Copyright Clearance Cen- (PIIE), where he has been a senior fellow ter, Inc., 222 Rosewood Drive, Danvers, since 1997. He has been a visiting scholar MA 01923; or email requests to: and consultant at central banks worldwide, [email protected] including on multiple occasions at the Fed- Printed in the United States of America eral Reserve Board, the European Central Bank, and the Deutsche Bundesbank. In 11 10 09 5 4 3 2 1 2006 he was on sabbatical leave from PIIE Library of Congress Cataloging-in- as a Houblon-Norman Senior Fellow at the Publication Data Bank of England. He is the author of Restor- ing Japan’s Economic Growth (1998), coauthor Library of Congress Cataloging-in- with Ben Bernanke et al. of Inflation Target- Publication Data ing: Lessons from the International Experience The euro at ten : the next global currency? (1999), and editor and part-author of The / [edited by] Adam S. Posen, Jean Pisani- Euro at Five: Ready for a Global Role? (2005) Ferry. and The Japanese Financial Crisis and its Paral- p. cm. lels with U.S. Experience (2000). Includes index. PETER G. PETERSON INSTITUTE ISBN 978-0-88132-430-3 (pbk.) FOR INTERNATIONAL ECONOMICS 1750 Massachusetts Avenue, NW 1. Euro. 2. Currency question. 3. Financial Washington, DC 20036-1903 crises. 4. Money--European Union (202) 328-9000 FAX: (202) 659-3225 countries. I. Posen, Adam Simon. II. Pisani- www.petersoninstitute.org Ferry, Jean. HG925.E867843 2009 C. Fred Bergsten, Director 332.4’94--dc22 2009010655 The views expressed in this publication are those of the authors. This publication is part of the overall programs of the Institute and Bruegel, as endorsed by their Boards of Directors, but does not necessarily reflect the views of individual members of the Boards or the Advisory Committees. LEGAL NOTICE: The views expressed in this publication are the sole responsibility of the authors and do not necessarily reflect the views of the European Commission. Contents Subtitle Author Preface v Introduction: The Euro at Ten—Successful, but Regional 1 Jean Pisani-Ferry and Adam S. Posen 1 A Challenging Anniversary 17 The Euro at Ten and the Financial Crisis Joaquín Almunia The Internationalization of Currencies— 23 A Central Banking Perspective Lorenzo Bini Smaghi The Euro and the International Monetary System 33 Dominique Strauss-Kahn 2 Underlying Determinants of Global Currency Status 41 Financial Network Effects and Deepening Kristin J. Forbes International Trade in Financial Assets 53 Philippe Martin Currency Invoicing of International Trade 61 Linda S. Goldberg iii Euro Area: Ready for the Storm? 69 Jean Pisani-Ferry and André Sapir Geopolitical Limits to the Euro’s Global Role 85 Adam S. Posen 3 Regional Perspectives 103 East Asia C. Randall Henning Euro Area Neighboring Countries 121 György Szapáry The Middle East and Oil Exporters 139 Mohsin S. Khan Latin America 155 Maria Celina Arraes Market View 165 Thomas Mayer 4 Is the Present Crisis the Moment for the Euro’s 181 Global Emergence? A Panel Discussion with Antonio de Lecea, Leszek Balcerowicz, C. Fred Bergsten, Erkki Liikanen, and Lawrence H. Summers About the Contributors 199 About the Organizations 211 iv Preface Subtitle Author The euro has now celebrated the tenth anniversary of its successful launch on January 1, 1999. In the midst of the greatest financial crisis of the last 70 years, the world’s only transnational major currency has delivered price stability to the people of the euro area, retained its value in interna- tional markets, and proven capable of weathering the storm—which at present came from both internal as well as external asset price busts and imbalances. While a few increasingly shrill and lonely naysayers remain, the euro has amply demonstrated its sustainability. Also euro-denomi- nated assets, particularly corporate bond issues, and euro-invoiced trade have come to make up an increasingly large share of the global total in real and financial commerce. The global role of the euro, however, remains much more uncertain. Many would argue that the current crisis is the euro’s moment: With the US economy at least perceived in many quarters to have brought on the crisis, and with that crisis attributed in part to global imbalances associ- ated with excess consumption by the United States, it would seem time for markets in general and governments holding reserves to look anew at the euro as the one viable dollar alternative.