My friend Barry Eichengreen, together with Marc Flandreau, has written a column in today’s Financial Times, that appears under the headline “Why the euro is unlikely to eclipse the dollar.” The body of the article is a claim that network externalities and tipping points are not important, or perhaps that they once were but no longer are.
The first two steps of their argument are:
(1) a multiple-currency system is the historical norm. The dollar-denominated system that we have experienced for more than 60 years is an aberration, so network externalities (aren’t) important.
(2) The dollar surpassed the pound in the 1924-25, not in 1948, so lags and tipping phenomena are not important.
Regarding (1), I have always thought that Barry has a good point that a multiple-currency system has one advantage, that it gives the lead currency some competition, which discourages it from abusing its position by excessive deficits, money creation, inflation and depreciation. But I disagree that network externalities are not also important: there will always be an advantage to having a lead currency internationally, just as there is an advantage to having a single money within each country.
Regarding (2), I have no problem dating the pound’s loss of supremacy from the 1920s, if that’s what the eminent economic historians say. But I don’t see how this affects any of the arguments. For one thing, the US surpassed the UK in economic size in 1872, and in exports in 1915. So there is still a lag of between 10 and 53 years.
More importantly, these propositions have no bearing on the central claim that Menzie Chinn and I have made: based on our statistically estimated effects of economic fundamentals, such as the size of euroland — which has recently passed the US economy — the euro now has the potential to rival or even displace the dollar as lead currency. We think we have also found statistical evidence of inertia and non-linearity, which imply a tipping point. But this doesn’t really matter. The scenario that we most emphasize leaves the dollar with an estimated share of central bank reserves only a little less than that of the euro even in the long run. Regardless what one believes about how fast it will occur or how complete the de-throning will be, our claim that the euro will challenge the dollar stands.