Italy is one country which has greatly benefitted from the introduction of the Euro. The United States, however, is likely to be less pleased about the emergence of the Euro as a potential rival to the USD’s reserve currency status.

Just in order to help your memory here is again my posting of September 13 10:29 on the Italian exit: “I suppose that discussing options for EMU-exit cum default or sine default, really makes a lot less sense than putting resources into dicussing how a post crisis regime could or better should be like. Which is probably getting us to the design of either a fiscal transfer system and/or a stabilization fund. Apart from the more structural approach of removing migration barriers still build into the mostly not fully portable social security systems.”

As for the other arguments: Running an external deficit or having a built-up of excess liquidity is the result of being a reserve currency. And both are, as you have put it, accidents waiting to happen. I suppose that the 1970s inflation problem in the US was just the opposite side of the coin to today’s external deficit.

And just before you start misinterpreting me again: As a normative I personally would very much favour the euro to become the world’s main reserve currency. But that goes hand in hand with the acknowledgement that EMU is not working properly and therefore we need to change its institutions to make it fit for the future. Even if it were just for not denying 10 million EMU citizens (the Portugese) the necessary relevance to European society.

We could argue the various external positions of a lot of countries in the EuroZone, hell we could even go into the current account positions of various regions. Is it relevant? No it is not. As a whole the EuroZone does not run a large external account deficit. That’s what counts as far as the Euro is concerned. Although, as you have pointed out:

“a reserve currency country has just two options: Printing money or running current account deficits to provide sufficient money to the external users”…..

so obviously running an external deficit is not necessarily incompatible with becoming a reserve currency. Although I think the “printing money” option you mentioned is debateable. What is incompatible with remaining a reserve currency is running the type of external deficit which the USA is running, and has been for so long, together with the totally clueless economic and foreign policy management of the current U.S. administration. The USD is going the way of the Pound Sterling. Why on earth would anyone want to hold it when it’s an accident waiting to happen? And as for GOLD, well obviously keeping your ear to the ground on that one. The move into Gold has only been going on for the past four years or so. Boy what an interesting new factoid. Not.

Fact is that this debate has run its course. Italy is not a candidate for Euro exit, does not run an external deficit (neither current account or trade) has not accumulated a large external debt position, does not rely on foreign savings and (despite the whinging from various Italian politicans during election campaigns) is not in a parlous economic position. That was my interest in this thread. Everything else can and should be somewhere else.

Current account balances as percent of GDP in 2005 (from IMF Economic Outlook September 2005):
Portugal: -9.3
Spain: -7.4
Greece: -7.8 (o.k. that was of course before they included prostitution in the GDP figure)
USA: -6.4

Actually, I do disagree that it should be irrelevant to the future of EMU if you have CA balances that are a lot worse than the US’ especially since the easy way out (devaluation) is blocked and there is no other regional offsetting mechanism. This is “not shifting the debate” but pointing to different examples of the same kind.

As for the “US pressure to dissolve the empire” please look to the Atlantic charter or Roosevelt’s speech on the four freedoms, the diplomatic intervention during the Suez crisis 1956 or the US stance during the Falklands war of 1982.

Apart from that Henry Kissinger’s Diplomacy might be some good reading (and just to make sure you don’t have to point that out, I know that he is both American and a Jew).

In addition to that, I’d like to point out that I do not consider the euro to be part of an anti-American conspiracy but nonetheless it might help to get European institutions fit for the single currency before the example of Portugal repeats itself in Spain, Greece or Italy. I consider this blog to be exactly about that question.

War was part of the British decline. But British arrogance and over reach went further than that. The misadventures of the USA in Iraq and Afghanistan are part of the USA’s problems right now. Bravo for noticing. The cost of war in Iraq and Afghanistan has enormously increased the U.S.A.’s external funding requirement. But U.S. savings were dismally low even before these foreign misadventures. The U.S.A. has mismanaged both domestic economic policy and foreign policy and, as a direct result, it has undermined its own international standing. It did all that entirely on its own with no help from anyone else. This mismanagement has contributed to weakening of the USD and to increasing lack of international confidence in the USD as an international reserve currency. Hence the resurgence in GOLD.

As for “US pressure to dissolve the empire”. Please explain. This is just more vague blab. When a void is created it is filled. When Britain fell into decline, other powers emerged to take its place. It’s called history. As the success and importance of the USA declines its place will be taken by some other area. That’s how history works. It doesn’t mean that the emerging power has to conspire to global domination or some other conspiracy-type nonsense. The Euro could feasibly take the place of the USD as a global reserve currency without Europe necessarily pushing that agenda.

As for the pound sterling and its reserve currency status. Well, I suppose you are going to argue now that World War II and the raising of necessary funds was not anything external but “economic decline and mismanagement” on Britain’s part.

As for myself, I’d argue that many of the UK’s post-45 economic hickups were related to the flooding back of GBPs from the rest of the world AFTER Britain could not maintain its reserve currency status which in turn was the result of a) high levels of debt for financing the war and b) US pressure to dissolve the empire.

As for the USD losing its reserve status, let me remind you that Sterling lost that status with no help from anyone else. Economic decline and mismanagement were sufficient. That’s how it works. That’s how it has ALWAYS worked.

I don’t disagree that the USD’s international position is likely to erode over time and that the US is to some degree worried about that.

However, my point is that as long as EMU is not only unwilling but actively denying to take the position of an alternative, it is not going to happen that the USD is properly challenged.

Apart from that, there is no denying that the EMU’s internal problems with economies drifting precariously apart has to sort out how to stop Germany’s beggar thy neighbour policies.

The point is that the USA obviously has concerns about any potential threat to the USD’s status as a reserve currency because of the USA’s enormous external funding requirement. The USA economy has become dependent on the inflow of basically risk-free foreign capital. Foreign debt is denominated in USDs and so the risk lies with the foreign holders of that debt in the case of USD devaluation. The world is currently looking for an alternative to the USD as an international reserve currency becasue the present situation is clearly unsustainable. And the USA looks vulnerable.

Europe is not seeking to undermine the USA or of the USD as an international reserve currency. From where I stand the USA is perfectly capable of doing that all by itself. Bush just accelerated that trend so that it is now travelling at the speed of light.