Spanish Prime Minister Pedro Sanchez (left), French President Emmanuel Macron (centre) and German Chancellor Angela Merkel (right) examine documents during an EU summit in Brussels last July. Photo: AFP
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
Why the euro has more to fear from the yuan’s rise than the US dollar
Crumbling political unity, policy stagnation and widespread failures in vaccination programmes have damaged markets’ confidence in the euro
Meanwhile, the Fed’s reputation is intact, interest rates and yields remain supportive and US recovery plans should have positive spin-offs for global growth
China has made good progress in encouraging the renminbi’s use as a fully fledged global reserve currency, but there is still a long way to go. At the moment, the renminbi’s share of world reserve holdings stands at 2.25 per cent, compared with 59 per cent for the US dollar and 21 per cent for the euro, according to the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves report.
As global acceptance of the renminbi as a reserve currency spreads, which major currency stands to lose out? Conventional wisdom suggests it could be the US dollar as the renminbi’s popularity rises and investors fret about the greenback’s potential debasement after the United States’ policy stimulus responses following the 2008 crash and the Covid-19 pandemic.
However, the euro’s global status is more at risk from the renminbi’s rise. The dollar’s domination of global currency markets still seems impregnable, for the time being at least.
The dollar has a long-standing reputation, which the euro still lacks. The euro came into being in 1999 on a fanfare of optimism that it would eventually challenge the dollar’s domination of global currency markets. After a strong start, the euro’s standing was badly scarred by the 2010-2012 European debt crisis.
The euro’s survival was on the line and only saved by a financial lifeline thrown by the European Central Bank and the European Union. Investor confidence has never fully recovered, with the euro’s share of the global currency reserves retreating from a peak of almost 28 per cent in 2009 to around 20 per cent in recent years.
Recent events have hardly helped matters, leaving the euro more vulnerable than the dollar. The failure to implement Covid-19 vaccination programmes more effectively has been a political own-goal for the EU.
Political unity seems to be crumbling, political risks are on the rise and currency debasement arguments seem worse for the euro than for the dollar, given the European Central Bank’s easing bias. Key policy interest rates are stuck below zero and many European governments’ yield curves are in negative territory.
There is no end in sight to quantitative easing with the European recovery still struggling to gain traction. Some countries in Europe are even flirting with a second leg of pandemic-led recession. Meanwhile, in the US, the Federal Reserve could be lining the markets up for tougher monetary policies fairly soon.
Europe’s political centre ground could witness a dramatic sea change soon. Political consensus between Germany and France normally provides a huge anchor of stability, but this is up in the air. A succession battle is heating up in Germany with Chancellor Angela Merkel stepping down later this year, leaving a huge political vacuum.
02:27
Coronavirus: French President Emmanuel Macron tests positive for Covid-19
Coronavirus: French President Emmanuel Macron tests positive for Covid-19
Meanwhile, French President Emmanuel Macron looks increasingly at risk in next year’s general election from the far-right Rassemblement National (RN), formerly the Front National. Even though the RN has said it is committed to keeping the euro and remaining in the EU, internal political tensions are bound to rise and cast a shadow over the single currency.
The euro’s challenge to the dollar’s domination of global currency markets could be over.
The euro’s star might be waning, but the dollar’s international standing is rising again. The Fed has emerged from the Covid-19 crisis with its reputation intact, relative interest rates and yields remain generally supportive for the US currency and US President Joe Biden’s recoveryplans should have positive spin-offs for global growth, too.
The dollar has an enviable track record as an international means of exchange, is a reliable base currency for global investors and a safe haven in times of stress. It is eminently convertible and backed up by unparalleled policy transparency around the world.
If there is a gap opening up in the global reserves sphere, it is for Beijing to fill and it could take a leaf out of the dollar’s book by following a simple formula.
All investors want is a reliable currency with easy convertibility which is universally traded and has sound intrinsic value and complete policy transparency. Confidence is key. In the medium term, as Beijing streamlines policies to broaden the renminbi’s international appeal, it can easily achieve a target of 10 to 15 per cent for global renminbi reserve holdings.
David Brown is the chief executive of New View Economics
