In search of safe havens: can the euro become a substitute for the dollar
The collapse of the markets after the introduction of US duties has once again fueled talk that the US dollar will gradually (or even quickly) lose its status as the world's reserve currency and a "safe haven" for international investors. The "tariff war" weighed on the anti-dollar scales following the growth of emerging economies, primarily China, and the expansion of sanctions as a financial weapon, which caused investors outside the United States to worry about the future of their savings. One of the candidates that could displace the dollar is now called the euro, which has really grown in recent weeks. However, the chances of a "European" becoming a leader among world currencies are very low, Izvestia explains.
The end of an exorbitant privilege?
The dollar was one of the key currencies of the world even before the Second World War, but it became a truly dominant force only since 1945. The collapse of the British Empire, Europe and East Asia lying in ruins, as well as the rapid growth of US GDP due to the military order made the American economy not just the largest in the world, but half of the global economy. The American GDP was significantly larger than the GDP of all the American allies combined. It is not surprising that against this background, the Bretton Woods system inevitably developed, in which the currencies of most industrialized countries of the world were pegged to the dollar, which, in turn, was pegged to gold.
In the 1970s, after France's attempts to exchange its available dollars for gold, the American currency was decoupled from the precious metal and began to float freely. The exchange rate was either pegged to the dollar, or it became a floating, fully determined market (the Jamaican system). Despite the fact that by that time America's weight in the global economy had decreased somewhat, the dollar's dominance remained. Competitors in the form of Germany and Japan, for all their successes, could not boast of either a huge, stable and liquid debt market or military power on a global scale. The dollar could have, in the words of French President Valery Giscard D'Estaing, an "exorbitant privilege" that the American government used as it wanted, but by that time there was a consensus among economists and investors that there was no alternative to the dollar as the main reserve currency.
Nevertheless, by our time, with the development of the BRICS countries (primarily China), the center of gravity of the global economy has become more evenly distributed. Questions began to arise: why does the dollar have such opportunities in a situation where the United States controls only 20% of global GDP, and is it possible to do something about it? The topic, which was discussed mainly theoretically, suddenly turned out to be very relevant after the introduction of comprehensive sanctions against Russia. Russian reserve currency accounts were frozen, and although a minority of countries imposed sanctions, all those who used American currency were forced to comply with them. This led to two effects: outrage over the inconvenience (it was impossible to throw Russia out of the global economy, and trade continued, with just a lot of problems and headaches), as well as fear about who might be next.
Well, the duties of Donald Trump turned out to be the catalyst for this "revolutionary" process. Fears of both the threat of a recession in the United States and the general instability of political and foreign economic exchange rates have led to a rapid reassessment of values by banks, investment companies, pension funds and other capital holders. Usually, during crises, the dollar almost always strengthens, and the yield on US debt obligations ("treasuries") falls. This time, the opposite was true: in April, especially in the first two weeks, the euro gained significantly against the US currency, and interest rates on American debt went up. The growth of the European currency was about 5%, and at some point analysts even allowed reaching the level of $ 1.2 per euro, which has not been seen for four years. Although this has not happened (yet?), the growth of the euro has been quite impressive. As for treasuries, the yield on 10-year bonds jumped by half a percentage point at once, approaching 4.6%, declining only after the tariff war eased. If it flares up again, it is possible to return to these marks and even overcome them.
There is too little liquidity
All these facts have led to talk about the gradual decline of the dollar not only in the media of developing countries or extravagant investors like Jim Rogers, but also in the economic expert mainstream of the West. With its possible replacement by the euro — as a "safe harbor" for investors, and then, in the future, the global reserve currency. However, according to experts, this is unlikely to be possible in the foreseeable future for a variety of reasons.
Firstly, the government bond market in the eurozone is much less liquid in principle. The volume of American debt securities in circulation is several times higher than the European figures. They are sold for $900 billion a day. It is worth adding that there are very few eurozone securities on the market: after 2020, when Brussels issued €750 billion in debt as a measure to combat the effects of the pandemic, the issue was discontinued. Thus, the main euro-denominated assets will be the liabilities of different countries of very different quality. This is even worse than if the dollar were supported by the debts of individual states — there is still a full-fledged general budget policy.
Secondly, and this problem logically continues the first one, from the economic point of view, the European space is extremely heterogeneous. There are huge differences in the financial and economic conditions of, for example, Germany and Italy. While the former has a small government debt and a reputation as an extremely reliable borrower, the latter periodically raises the issue of either default or a program to support the national economy from the outside, as was the case with Greece during the crisis of the 2010s. In general, we can say that the states of the European north — Germany, the Netherlands, Finland — are financially standing much stronger than the states of the south, starting with France. Moreover, many fiscally responsible countries have not yet adopted the euro as a currency, and this applies to both the old (Denmark, Sweden) and new EU members (almost all of Eastern Europe, excluding small countries like the Baltic republics and Slovakia). Some of them even refuse to link national currencies to the euro, preferring floating exchange rates. As you can see, the euro is not so attractive even for many Europeans to sacrifice monetary independence for it.
Finally, the overall economic situation of the EU and the eurozone is far from ideal. The United States is much richer than Europe: the poorest American states are above the richest European countries. Of course, we are talking about comparing current exchange rates: the real standard of living does not differ so much, but this indicator is appropriate for comparing the impact of economies on the world stage. The European Union is in many ways a technologically backward entity, relatively weak in terms of the development of the most advanced industries. Moreover, it is also not self-sufficient in terms of resources, which makes it extremely vulnerable to external shocks. The calculation of those who wanted to switch to euros could be based on the fact that the United States could suffer serious damage from a tariff war. This is a likely scenario, but the same applies to the EU — and its losses can occur regardless of participation in trade wars. For example, in a scenario where Chinese goods that have lost the American market will flood into Europe, displacing products from the local industry.
In any long-term perspective, the euro is poorly suited as the main reserve currency, and the bonds of the EU countries are not suitable as a haven during crises. However, there are such states outside the European Union — their currencies periodically rise when the dollar falls amid crises. These are Japan and Switzerland. But in a global sense, the yen and the franc will also not be able to replace the dollar. Their markets are limited in size, and the governments of their respective countries are less willing to let their currencies grow indefinitely, destroying national production. Switzerland, for example, regularly intervenes in the foreign exchange market to prevent its franc from strengthening.
The fate of the dollar largely depends on developments in the coming years. If the severity of international crises subsides, the US currency will remain the uncontested leader of the global reserves market for some time. If the situation worsens, the role of the dollar will probably fall, but the scenario of a multicurrency system is much more likely. The new dominant force, whoever is at its center, is unlikely to "take off."
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