A ONE-AND-A-HALF CURRENCY SYSTEM
Even before Europe’s Economic and Monetary Union (EMU) came into existence nearly a decade ago, a brilliant future was predicted for the euro as an international currency. Leadership in monetary affairs would no longer be the privilege of the United States alone. The global currency system would now rest on two pillars, not one. Reality, however, has turned out to be quite different. Though the euro has firmly established itself as an international currency, the degree of change has been considerably less than expected. Europe’s joint money remains at a distinct disadvantage in relation to America’s greenback, limiting the role it can play in monetary governance. The euro is not yet ready for prime time. This can be described as a one-and-a-half currency system – certainly not a two-pillar world. The paper addresses two critical questions. First, just how has the global currency system been changed by the arrival of the euro? Here we elaborate on what we mean by a one-and-a-half currency system and spell out the reasons why we believe the euro is still not ready for prime time. Second, what can Europe do to overcome the euro’s disadvantages and thus enhance its role as the second pillar of the system? The main imperative, we argue, is to improve EMU’s ability to project power effectively. Dual leadership at the global level is not out of reach but will require determined reform of EMU’s governance institutions.