The 'international' Euro, the dollar, and thoughts on global currency

The International Euro's French Connection

Should the Euro be considered an official global currency? By dint of colonial French conquest, the Euro finds itself with an official or semi-official (albeit small) footprint on three additional continents - Africa, South America, and North America. Indeed, as you read this, there are ATMs stocked with Euros on a tiny island off the coast of Newfoundland ready to be withdrawn.

While the official currency of this island is indeed the Euro, these 'North American' Euro ATMs in fact only accept credit cards. But it is not a stretch to imagine a payment infrastructure that can indeed stretch around the world. The barriers to a global currency are clearly not geographic or technological, but rather political and economic. This same island, for example, operates on European - not North American - electric outlets and voltage for no other reason than it belongs to France.

However, these tiny examples of the Euro's extended reach are no match for the international popularity of the US dollar - the global currency adopted by countries around the world actively rather than colonially.

The US dollar - our global currency...for now

The popularity of the US dollar around the world is a clear signal of trust in the country and its form of government, and it is this trust that may be the largest barrier to the adoption of an international global currency that isn't the US dollar or any other specific fiat currency.

Why? Because an international currency needs a reputable issuer, and the international market has one - the United States.

Consider an analogy of currency being like the shares of a publicly traded company. As an investor, what questions would you want answered before purchasing shares? How about - who is the CEO, and what is his/her vision for the organization? How strong and diverse is the company's board? What is the strategic plan for the firm, and its track record in achieving growth?

This is effectively how investors or countries ultimately choose to invest in the currency 'shares' (and monetary/fiscal policy) of the United States. And for countries that actually formally adopt the US dollar as the domestic currency - it is a significant buy-and-hold investment.

It is perhaps the greatest indication of a nation's deep stability that other countries adopt its currency, and the citizens of the adopting country accept the arrangement. These citizens are comfortable in using the currency as savings, investing with it, transacting with it, and as needed, converting back to domestic currency if such a currency exists. In other words - they are comfortable with using it as the global currency.

What would it take for these countries or their citizens to change their minds and decide the US dollar is not the preferred global currency, but rather another currency or perhaps an IMF creation? It would take a lot. The need to establish trust is a substantial barrier to entry for such a replacement. Are central banks trustworthy? Are private for-profit corporations trustworthy? More trustworthy than a democratic note-issuing country with a massive and deep economy that has survived multiple crises and come out relatively unscathed and always on top?

The next global currency

Of course, having an international currency which is also a domestic currency for a given country poses its own problems, and former Bank of England governor Mark Carney has pointed this out. Churchill once said that "Democracy is the worst form of government, except for all the others". You could substitute 'US dollar' and 'global currency' in this phrase quite easily.

The replacement of a specific sovereign currency as the global currency, with something more thoughtfully designed, is probably inevitable in the long run. As Carney is quoted as saying in the above article, "“Even a passing acquaintance with monetary history suggests that this center won’t hold.” But it will take substantial political and economic will to achieve this.

And more so, it will require significant trust in the supporting model to garner active acceptance by the global populace. As the Euro demonstrates - colonial conquest will not be enough.