Comment: Euro pipe dream holds no currency

President of the European Commission, Jean-Claude Juncker, argued that the euro should replace the dollar as the world's reserve currency. Photo / 123RF

COMMENT: Over the next ten years, it will become the global currency of choice.

Central banks will be stockpiling it in their vaults. Oil will be priced in it. So will gold and most other commodities, while traders will make it their default option for every deal.

You might think we are talking about China's yuan, or Bitcoin, or some whizzy new blockchain token. But according to Jean-Claude Juncker, this is what is ahead for the euro.

In this State of the Union address this week, the President of the European Commission argued that the euro should replace the dollar as the world's reserve currency, with a plan promised by the end of the year.

The euro? For real? A currency that has been declining steadily in its share of global reserves? There is more chance of the Iraqi dinar taking over the world. In truth, by re-heating that tired rhetoric all the EU's leaders are doing is demonstrating how far from reality they keep travelling with every year that passes.

Challenging what the former French President, Valery Giscard D'Estaing, once described as the 'exorbitant privilege' of the dollar has long been an ambition of Europe's committed federalists. Controlling the world's reserve currency not only helped the American economy, they argued.

It solidified that country's dominance of world trade. Replacing it was one of the explicit goals behind the creation of the single currency.

The euro-zone, with a larger population and equal economic weight to the United States, would usurp the dollar's role, and capture all the economic advantages that came with it.

Juncker was banging that drum with renewed vigour this week. "It is absurd that Europe pays for 80 per cent of its energy import bill – worth 300 billion euro a year – in US dollars when only roughly 2 per cent of our energy imports come from the United States," he complained.

"It is absurd that European companies buy European planes in dollars instead of euros. This is why, before the end of the year, the Commission will present initiatives to strengthen the international role of the euro. The euro must become the face and the instrument of a new, more sovereign Europe".

There will be plenty of support for that around the rest of the continent. By Friday, the Spanish foreign minister was pushing the same line, and no doubt many other presidents and finance ministers will chime in with similar statements.

European Commission President Jean-Claude Juncker. Photo / AP

By Christmas we'll see what the actual plan is. One thing is certain, however. It has a heck of a long way to go. A report this summer from the European Central Bank (ECB), hardly a biased source, admitted that, far from growing in importance, the euro is actually shrinking.

Soon after the currency was launched in 1999, it accounted for 20 per cent of global reserves. By 2003/4, it was close to 25 per cent. But after that, it stalled and then went into reverse. By last year, the euro accounted for just 19.9 per cent of global reserves, the lowest level since launch, and this year it showed no significant improvement. It has fallen by 3 percentage points since 2009.

On other measures, such as share of international loans or global deposits, it is declining as well, according to the ECB.

Indeed, the euro doesn't appear to be any more significant than the currencies it replaced.

Back in 1990 and 1991, according to Bundesbank data, the German deutschmark by itself accounted for 19 per cent of global reserves (although it fell back to a more normal 14.5 per cent by 1996, after a few tens of billions were blown trying to defend the ill-fated Exchange Rate Mechanism). That is about where the euro is now.

Even the old French franc accounted for 2.4 per cent of global reserves in the 1990s.

This means that the euro accounts for a smaller proportion of global reserves than the combined share of the currencies it replaced. Instead of enhancing Europe's role in the global monetary system, it has diminished it.

The reasons for this are not exactly hard to work out. Sure, the euro has been patched up in the last few years. But it came close to collapse in the last crisis and may easily do so again in the next.

A populist government in Italy is threatening to break all the budget guidelines and has discussed plans for a parallel currency as a way out of the euro.

None of the faultiness have been fixed, and Emanuel Macron's plans for reform have already come to nothing.

Germany's trade surplus has ballooned into one of the largest the world has ever seen, to the extent that it is now a major threat to economic stability.

And, perhaps worst of all, even after two trillion euros of printed cash, growth remains anaemic, and there is little sign of a new wave of entrepreneurial companies to revive the eurozone's economy.

The dollar faces serious challenges. Under an erratic president, it is abdicating global leadership. Even with robust growth this year, its share of global GDP is in relentless decline.

Over the next decade, you can make a case that Bitcoin may over-take it. So might the Chinese yuan. Or some version of blockchain technology that Amazon or Apple are working on.

But the euro? Forget it. All Juncker was doing was demonstrating that he lives in a rhetorical bubble - and is getting more detached from reality all the time.