When the euro was created some 15 years ago, there was speculation that the new currency might come to challenge the dominance of the U.S. dollar as the international reserve currency of choice. But the euro’s guardian, the European Central Bank (ECB), had little appetite for such a role. Likewise, foreign exchange markets showed little support for supplanting the dollar’s hegemony with the euro, despite a move into euro-denominated bonds and a strengthening of the value of the euro over the 2000s. This has meant that the EU has, in large part, played a “helper” role in U.S. financial hegemony throughout the postwar era to today.
But now, Europe’s “helper” status may well be in question. The populist forces that have emerged throughout the continent challenge the legitimacy of the euro and threaten both the institutional and ideational foundations upon which it rests. With this uncertainty arises the possibility of the EU turning into a “risk generator” within the global financial order or perhaps even worse—a “spoiler” of the very system itself.
AN INCOMPLETE POLITICAL DEVELOPMENT
The sovereign authority of the ECB is critical to the broader stability of the global financial system. But one of its key weaknesses involves the particularities of the euro’s design: unlike every other successful single currency, the ECB stands by itself at the European level, without the broader societal and political institutions needed to give currencies a solid and durable foundation. There are four roles in which this broad structure of political authority is needed: to serve as a trusted generator of market confidence and liquidity, to provide robust regulation of financial risk, to build mechanisms for fiscal redistribution and economic adjustment, and to create the political solidarity necessary to undergird hard times. It is this lack of broader governance that places the euro in jeopardy and creates its “spoiler” potential for the international financial system, not its shortcomings as an optimum currency, as some economists such as Paul
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