The Fading Promise of the Euro

When the euro was created in 1999 the new currency promised to facilitate trade within the euro zone, to further unify Europe, and to challenge the dollar as the world’s reserve currency.  The common currency does facilitate trade, but the differing goals of the member countries seem to be creating more divisiveness than unity today.  The promise of the euro as an international reserve currency has faded substantially as a result.

I recently saw evidence of this on a trip to the Republic of Georgia, which was a Soviet Republic prior to the dissolution of the Soviet Union, and which is now trying hard to strengthen its ties with Europe for economic and political reasons.  Despite the desire for closer ties with the EU, the currency of choice in Georgia is the dollar.

Georgia’s currency is the lari, but I noticed a number of prices for big-ticket items advertised in dollars.  Condos for sale listed their prices in dollars, not lari or euros.  A Georgian I asked about this told me that for items costing under $100 transactions tended to be in lari, but for larger purchases prices were quoted in dollars and payment was made in dollars.

When the euro zone was established the European Central Bank was set up to be independent of the fiscal operations of the member states.  Had this remained the case, the euro might be a potential challenger to the dollar in international markets.  But politics has altered the European Central Bank’s mission and it is now messily involved in trying to address the fiscal problems of Greece and other eurozone nations.

The Federal Reserve Bank here in the United States can’t stand as a model for the European Central Bank after its interventions in the bailouts of banks and other financial firms in recent years, but it appears that the Fed’s interventions have harmed the dollar less than the European Central Bank’s interventions have harmed the euro.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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