At its initiation in the 1970s, the project of European monetary integration aimed not only at the internal goal of reduced transactions costs. Its broader ambition—in the era of increasing exchange-rate turbulence that followed Nixon’s revocation of Bretton Woods—was to build a currency, a financial system and a Europe-wide economy with greater autonomy from policy and financial measures in the us. Instead, the developments of the past decades have seen the increasing subordination of monetary and financial conditions in the Eurozone to their counterparts in the us. This systematic relegation can be tracked across a wide range of operations. As this paper will explore, subordination is also evident in the security markets, especially the dominance of us bond markets, as well as in the functioning of the ecb, the money markets and the supply of short-term credit.footnote1
Ultimately, this subordination—a process of informal dollarization—threatens to undermine the process of European construction. As corporations are more tightly tied into dollar-based financial markets, it becomes harder for the eu to influence their operations. The social and environmental goals the eu has set itself depend upon an economy with a financial system sufficiently liquid and robust to work in parallel to the dollar-based system, rather than as an appendage to it. Unless Europeans can recover their original ambitions for an independent currency union, these goals will increasingly be beyond its powers. This contribution will examine the different forms eu dollarization may take, including the dynamics at play in the enormously influential fx swap market, and the comparative roles of the Fed and ecb, as well as the eu policies that serve to undermine the bloc’s financial autonomy. But first, some more general considerations on dollarization are in order.
Historically, dollarization has typically been a response to hyperinflation, as in the Latin American crises of the 1980s and 90s. Can it also apply to conditions of deflationary pressure, such as those imposed on the weaker Eurozone countries by the structures of monetary union? In an inflationary crisis, as Michel Aglietta and André Orléan argued in La violence de la monnaie, the Central Bank’s money-making is at stake—the heart of the system.footnote2 This centralized dynamic facilitates a rapid move away from the discredited currency and switch to a new monetary system. It is a process that works to the advantage of debtors, eliminating their old-currency liabilities. By contrast, a classic deflationary crisis is de-centralized, dominated by multiple creditors who, in the absence of conditions for profitable investment, press for immediate returns, inducing the liquidation of assets, falling prices and flight to the ‘purity’ of Central Bank reserves or gold. The logic of deflation works slowly—destroying old economic relations long before new ones have developed.footnote3 In the classic case of deflationary breakdown, the general departure from the gold standard in the 1930s, there was no common move to an alternative until 1944, at Bretton Woods.
Today, the salience of the dollar as an alternative and the unresolved deflationary pressures arising from the workings of the Eurozone may be inducing a form of dollarization that operates through the slow erosion of certain monetary functions. This need not be a unified process; one might expect a turn to the dollar to be earlier and more complete in the weaker Eurozone economies than in Germany. The argument here is that dollarization is operating through a process of ‘indirect integration’, by way of the common subordination of member states to us institutions. For Europe, this would be nothing new. Washington played a major role in the birth of the European integration project,footnote4 and there have been numerous examples since. After the dissolution of the European Payments Union (at Britain’s insistence) in 1958, de facto monetary integration operated through the Bretton Woods exchange-rate regime: the franc was tied to the Deutschmark because both were tied to the dollar. (De Gaulle’s bid for monetary independence collapsed with the événements of 1969.) Similarly, the irony of Eurocrat discourse about the ‘European company’ was clear to many commentators: the corporations that moved most fluently across the ec’s internal borders and were least tied to particular locations were, in fact, American multinationals.
‘The villainy you teach me I will execute, and it shall go hard but I will better the instruction.’ American financial practices, often imperfectly understood by their European imitators, have had enormous influence on the behaviour of both private and public actors in the eu. Consider the breath-taking leverage ratios achieved by Eurozone banks in the pre-2008 subprime/securitization bubble, which easily surpassed those of their us counterparts. Again, just when the shareholder-value drive was meeting some determined judicial and legislative resistance in the us, the European Commission went all out for a directive that would abolish any effective defence against hostile takeovers.
Though the ecb carefully monitors the overseas use of the euro, it always insists that it has no external policy objectives. The absence of an active global policy reflects, as do so many of the dysfunctional aspects of the monetary union, the parochialism of the German authorities, now reinforced by the equal commitment to Biedermeier styles by the so-called New Hanseatic League. This is a damaging abdication, weakening Europe’s potential influence on the evolution of global financial institutions and practices. But it has also introduced incoherence into its internal monetary policy. An ecb report on the international use of the euro estimates the loss of efficacy of monetary-policy instruments due to the growing interpenetration of us and Eurozone financial systems at around 5 per cent.footnote5
It is telling that the ecb goes on to suggest that this loss is compensated by moves in the dollar–euro exchange rate, induced by its interest-rate moves. Countries that implement monetary policies by targeting their dollar-exchange rates are already in a clearly subordinate position: there is no Rodrikian ‘trilemma’ for them—no conflict between globalization, sovereignty and democracy.footnote6 Their open capital accounts have already eliminated monetary independence, because they can never treat their exchange rates as a matter of indifference. On the contrary, regardless of the formal nature of the policy—float, crawling peg, or whatever—they have to set domestic interest rates in function of foreign-exchange pressures.footnote7 Turkey in 2018 was a case in point.