Economist: Dollar Will Fall to the Euro

James, while I myself am a diehard pro-USA Atlanticist, I'm afraid you dismiss Frankel's case way too readily, and I have to dispute your 3 reasons. You say that we're the global military superpower, but that's exactly the problem-- we're a global military superpower who realistically can't afford to be one, certainly not at the levels that we're trying to sustain. This is one of Frankel's points-- we've overestimated our ability to maintain such a large and powerful military, which has led to the imperial overstretch that is bankrupting us. This is exactly how prior Western Empires fell apart.

You seem to forget that when Ancient Rome, Imperial Spain, France, Britain, Netherlands etc. had their Empires, they were able to maintain at least a partially favorable balance of payments that maintained themselves as creditors and ensured trust in their currencies. IOW, yes they were military superpowers in their day, but they could *afford* to be military superpowers. We cannot. It does not matter one bit whether or not we're more "willing" than the EU to undertake military adventures-- what does matter is that we can't pay for them, and that's the kind of thing that destroys Empires. In fact, those Empires fell apart not because the relevant countries became "unwilling" to use military force, but became *too willing* to use it in stupid wars that bankrupted them.

What destroyed the British Empire above all else was its disastrous decision to enter World War I, where it had very little in the way of national interests-- other than letting the Continental imperialists slug it out amongst each other-- and where the UK, upon entering, would have been best served by inviting a kind of negotiated peace by around 1915 or early 1916 at the latest. The British failed to do this, and the serial disasters of that war-- not just the headliners like the Somme, Passchendaele, Gallipoli, the Zeppelin bombings, Kut and many others-- liquidated about 3 centuries' worth of British credit almost overnight, while killing off the best and brightest of Britain's young generation (Oxbridge got slaughtered in those trenches) and wounding the rest so badly that their ability to maintain an Empire was badly damaged. Oh, while also encouraging independence movements in the Colonies, inspired in part by e.g. the Bolshevik rhetoric and the movements that grew out of WWI. The Second World War damaged the UK further, and British defeats in the Suez, Israel, Aden and elsewhere provided the coup de grace-- but it was WWI that trapped the British in that miserable situation.

Staying out of bad wars has *everything* to do with maintaining an Empire, which the British failed to do, and the EU has done this much better than we have.

Second, the demographics and fiscal solvency-- are you kidding??? Despite all the crap about "the old and decrepit EU," their population is much larger than ours, and collectively, the EU's immigration levels are higher than ours as well, with lots of high-quality, technically-educated immigrants as well. Every year, the EU brings in millions of people from South America, Russia, eastern Europe outside the EU, and the lion's share of the smartest minds from South, SE and East Asia. Native-born fertility rates in the EU and USA are both well-below replacement levels, so immigration in both places makes all the difference at this point. And it's not at all clear which side is better placed. Both the EU and USA benefit from immigration-- although both have been hit by ethnic tensions, crowding and other issues. It's not an issue of who has the numbers, it's who has the numbers that they can gainfully employ in value-added and high-tech industries, and incorporate into their societal structures. Considering the miserable infrastructure, traffic jams and other problems in immigration-heavy US cities, I'm loath to assume that we come out ahead on the balance sheet.

On the fiscal solvency issue-- this, again, is the whole point about the military overextension. The EU has strict requirements about deficit spending to even gain admission into the club. We don't have that in the USA, and our national debt is thus exploding at a disastrous rate, much more so than in the EU. The comptroller of the USA shows that we're approaching $40 trillion in obligations. He's a pretty hard-headed guy, and I wouldn't ignore this.

Finally, on who's competitive and more innovative-- the jury's out on that, frankly. The EU is a real patchwork of places, and especially in Germanic Europe, it's a very innovative place. They've been getting far more patent applications and IPO's than we often realize there, and because the EU's banking system hasn't collapsed to nearly the same degree as ours has here, if anything it's become easier to set up a company in the Eurozone than here.

I'm not saying this to go indulging in pessimism, but the truth is, we're fantasizing if we think that the USA and the dollar have little threat here.

Every time I go on overseas business trips, nobody wants the dollar anymore. They want Euros or the local currency. You can stick your head in the sand all you want, but this is reality. The Euro is not the yen-- it's hosted by a much, much larger and more populous network of people, with far more natural and human resources and, yes, much more military power as well. The EU may have been hesitant to intervene in Iraq, but this doesn't mean that they're military-averse-- it means that they balk at getting dragged into wars with little in the way of national interests. It leaves them with more forces for any fights that really are necessary to wage.

We need some serious reforms here in the USA, and immediately, but unfortunately what we've got instead is utter political paralysis. You're dreaming if you think that the Euro doesn't pose a threat. Unless we make some big changes fast, better control our financial state and especially, be more sensible about our military spending (make ourselves leaner and meaner, avoid these draining wars), then yes, we definitely will be going the way of the British Empire after the Suez.

Roger of CT 3:25PM March 18, 2008