The Currency of Confidence
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.
Shifting Global Roles
In the meantime, the U.S. dollar remains of paramount importance to the world economy. The continuing use of the dollar to price oil is but one illustration and it is held by central banks as the prime reserves. But as the U.S. loses ground in terms of its share of global exports, industrial and manufacturing capacity, and indeed confidence in its ability to deal with its own domestic economic affairs, its international role is going to suffer eventually. The ability of the U.S. to project not only economic power but also geopolitical leadership in a world in which the parameters of security are no longer defined by the Cold War divisions will be impaired. The story of how that unfolds is written in British history books.
Given the current equation of interdependence shared by the U.S. and the American dollar with the rest of the world, it is unlikely that a U.S. meltdown will be caused by external pressures coming from China or Europe. In fact there are enough problems for both Europe or China to deal with in terms of their own debt or in terms of securing a stable platform to incorporate millions of new expectations emerging throughout China and making the rulers in Beijing increasingly nervous, as can be seen in the political crackdowns being carried out throughout the country.
In fact, the situation the U.S. faces is in its own hands. If there is going to be a level of confidence sustained in the U.S. in the coming years, it will measured not necessarily by the dollar’s value but rather by its ability to have the capacity for affording what it needs to be a leading power, measured in either hard or soft terms. Whether it is the capacity for military presence in places around the world where, as we currently see in Libya, it is irreplaceable; whether it involves maintaining the capacity to make strategic relations work with key countries we need to influence in our own national interests; or whether it involves the capacity to reach out to people around the globe with development aid, educational opportunities, or emergency assistance as in Fukushima right now, all of that depends on maintaining a healthy, growing economy and the political consensus needed to invest in it.
Germany as an Example?
Germany is being held up by some in the U.S., on both sides of the political spectrum, as an example of how to sustain a strong and competitive manufacturing base with a strong, invested labor force while seeking out new frontiers of innovation. It is also held up, along with other European countries, as a warning sign of too much government spending and taxation. Even if both arguments have their points, the fact is that Germany’s economic situation looks impressive in comparison with others in Europe and indeed with the U.S. Germany will always have its own equation of how much state, how much market, and how much social spending will make up the consensus on which governments in Berlin can both argue and make policy. Just as constantly, that will always be different from the U.S., given both divergent cultural and historical narratives.
In the end, the euro or the dollar will not be the benchmark for the success or failure of the German or American economic outlook in the coming years. It will be generating enough agreement on what needs to be done to maintain confidence at home and abroad in the ability to govern effectively. Both Germany and the United States are now facing serious challenges in accomplishing just that.
This essay appeared in the April 22, 2011, AICGS Advisor.