Fluctuating Values
With everyone in Washington focused on the looming battle over the debt ceiling debate, one benchmark for measuring the impact of the U.S. increasing deficits is the declining value of the dollar – and the corresponding increase of the euro. And it is all about confidence in the U.S.

The dollar is now at its lowest point as set against other major currencies in almost four decades. Meanwhile the price of gold and silver has skyrocketed, with an ounce of gold now over $1,500. Similarly, the euro is at an eighteen month high against the dollar despite the concerns about the financial status of some of the euro zone’s members.

Currency and Power
Amidst the complicated jargon of economists trying to explain the ups and downs of the exchange rates, there is a bulwark that is at the base of it all: Stable confidence in currency. When that becomes shaky, there is turbulence not only in the markets but also in the larger political constellation of power. For decades, the U.S. dollar has enjoyed that confidence as the world’s international currency. Even in the turmoil of the recent years, the dollar remained targeted in that role. But in the wake of the crisis, serious questions emerged about the ability of the Treasury to keep the debt under control, particularly among those investors outside of the U.S. who now hold the majority share of U.S. debt. More serious questions were raised about the ability of the United States to get its fiscal house in order, starting with its financial markets but going well beyond that. The current posturing in Washington over the vote to increase the debt ceiling is an illustration of the political games going on amidst these worries about the stability of the decision-making process on both ends of Pennsylvania Avenue.

At a time when the role of the United States as the largest economy in the world is changing – as are the roles of the developing countries where global growth is going to be decisive – the role of the dollar can also be questioned or evolve in a direction in which its role could be shared in a global market. Would that be with the euro, as the second most significant currency operating on the world stage? Perhaps – but there are many hurdles for the euro ahead, the most serious of which is the strengthening of its ability to fulfill the requirements of an effective monetary union. The balance of the European Union’s institutions with national sovereignty issues remains uncertain, and the political support for strengthening control over delicate domestic issues is at best asymmetric, be it within the paymaster of Europe, Germany, or within those countries struggling with their economic futures like Portugal and Greece. Europe, it is said, makes progress best in crises but there are many to go before these challenges can be overcome. In that respect, it is useful to keep in mind that the EU is at base a political project, and therefore subject to all the centrifugal and centripetal forces which go along with twenty-seven nations trying to forge common denominators. Many of those problems are not economic but make up the social and even cultural dimensions of the European continent, such as immigration challenges and demographic trends.