Economist: Dollar Will Fall to the Euro

Yet, strangely, America's long-term economic prospects seem stronger than Europe's.


Over at the VoxEU econ site, Jeffrey Frankel, an economics professor at Harvard and former member of the Council of Economic Advisers under Bill Clinton, makes his case that the euro will usurp the dollar's place as the de facto global currency. He concludes by comparing the decline of the greenback to the decline of the British pound (boldface mine):

The decline in the status of the pound during the course of the first half of the 20th century was part of a larger pattern whereby the United Kingdom lost its economic pre-eminence, colonies, military power, and other trappings of international hegemony. As some wonder whether the United States might now have embarked on a path of "imperial over-reach," following the British Empire down a road of widening budget deficits and overly ambitious military adventures in the Muslim world, the fate of the pound is perhaps a useful caution. The Suez crisis of 1956 is frequently recalled as the occasion on which Britain was forced under US pressure to abandon its remaining imperial designs. But the importance of a simultaneous run on the pound and President Eisenhower's decision not to help the beleaguered currency through IMF support unless the British withdrew its troops from Egypt should also be remembered.

My take: There are a few key differences that Frankel omits. The United States is the global military superpower, and there is no sign that the conflict-averse European Union wishes to contest that position. Second, the long-term demographics and fiscal solvency of the United States are much superior to those of Old Europe. Third, the United States has the more competitive economy and is far more innovative. And while I have no doubt that many nations will diversify their currency holdings, that's quite a stretch from the euro's becoming pre-eminent.