On Friday, Benjamin J. Cohen gave a talk at FU Berlin. Cohen, who is a professor of International Political Economy at UC Santa Barbara, is probably most famous for his work on the Geography of Money. He was invited by the KFG and the International Research Training Group “Between Spaces” to talk about the future of the euro as an international currency.
As the somewhat pessimistic title of the lecture – “The Euro Today: Is There A Tomorrow?” – suggests, this was not meant to be a pep talk for worried Europeans. In fact, Cohen’s short answer to his own question is: No, the euro will not bounce back from its current crisis, but instead face a “long, lingering slide into marginality”.
First, some preliminaries: Cohen was not talking about the future of the currency as such, but specifically about the euro’s role as an international currency: To what extent will it be used by non-members of the eurozone – not as a substitute domestic currency (“dollarization“), but for international purposes? More technically, the question is about the use of a currency as a unit of account, store of value, and/or medium of exchange.
To put it short, the argument here is that the euro is nowhere close to the dollar both in scope (which functions it fulfills) and in domain (where / by whom it is used).
The crucial problem, according to Cohen, is that there is no genuine European federation to support the currency. Without an institutionalized transfer union, fiscal imbalances in the EU can only be fought by political agreements. A repetitive pattern of rescue packages and “shoddy compromises” is the result, and the permanent pressure on debtors to implement austerity policies leads to an “anti-growth bias” inherent in the euro project.
This fundamental flaw, at the end of Cohen’s causal chain, lets market actors (investors, traders, etc.) lose confidence in the stability of the euro and discourages them from using it for international trade and financial needs. Thus, while EU policymakers won’t let the euro die, it will never become a full-fledged international success. A possible solution – a political federation with an automatic transfer union to fix fiscal imbalances – is out of reach: According to Cohen, the EU’s and the Eurozone’s best days are behind them; now both groups have just grown too diverse and too big for their own good.
While Cohen certainly has a strong argument to make and was careful to base his prediction on well-justified claims, to me it seemed that he chose to neglect some more optimistic readings. First, while he addressed several changes in the EU, he failed to specify why exactly a grand bargain should be impossible. Learning and political leadership were not mentioned. Second, his empirical claims about the decline in the euro’s international usage could have been more persuasive. Looking at the latest report by the ECD on the international use of the euro, it seems that the European currency was “relatively resilient”. The exchange rate hasn’t collapsed, and a quarter of worldwide official foreign exchange reserves are held in euros.
This brings us, finally, to Cohen’s proposed link between structural political problems and the confidence of market actors: Do bankers, traders, investors etc. really abandon a currency that reduces their dependence from the dollar and has historically kept a stable exchange rate as well as low inflation – because they are doubtful about the long-term “economic vigor” of the Eurozone? I wonder whether Cohen’s statements are a description of what market actors ought to do given the political circumstances – rather than a reliable prediction of their choices…
Recommended reading: The Future of the Dollar, a 2009 edited volume with contributions from Cohen, Eric Helleiner, Herman Schwartz et al.