Meeting the world’s demand for safe assets? Macroeconomic policy and the international status of the euro after the crisis
| DOI | 10.1177/1354066117744030 |
| Author | Mattias Vermeiren |
| Published date | 01 March 2019 |
| Date | 01 March 2019 |
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https://doi.org/10.1177/1354066117744030
European Journal of
International Relations
2019, Vol. 25(1) 30 –60
© The Author(s) 2017
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DOI: 10.1177/1354066117744030
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Meeting the world’s demand
for safe assets? Macroeconomic
policy and the international
status of the euro after the
crisis
Mattias Vermeiren
Ghent University, Belgium
Abstract
In this article, I engage with the chartalist literature to explore the political foundations
of international currencies. Drawing on this literature as well as on recent scholarship on
the shortage of safe assets in the world economy, I challenge a prevailing premise of the
International Political Economy literature that international currency status needs to be
based on conservative macroeconomic policy institutions and practices, which is deemed
necessary to maintain foreign confidence in the stability of the real value of the international
currency. I contend that international currency status in the post-crisis world economy
hinges on the willingness and capacity of the currency provider to adopt accommodating
monetary and fiscal policies. First, the central bank needs to offer a backstop to the market
for sovereign debt securities by acting as a lender of last resort to the government, whereas
fiscal policy expansion is necessary to sufficiently expand the stock of the only securities
that can assume the function of genuinely safe assets: sovereign debt. Second, expansionary
monetary and fiscal policies enable the international currency issuer to supply safe assets
to the rest of the world by running deficits on its trade balance. This article analyses how
the European Central Bank’s monetary policy decisions in the wake of the crisis ran against
these two prerequisites, constraining the Eurozone to become a large net provider of
safe assets in the world economy. By linking these decisions to the creditor and export
interests of the Northern Eurozone countries, it disputes the European Central Bank’s
‘neutral stance’ regarding the internationalization of the euro.
Keywords
Crisis, dollar, euro, European Central Bank, fiscal policy, monetary policy
Corresponding author:
Mattias Vermeiren, Ghent University, Universiteitstraat 8, Gent, 9000, Belgium.
Email: mattias.vermeiren@ugent.be
744030EJT0010.1177/1354066117744030European Journal of International RelationsVermeiren
research-article2017
Article
Vermeiren 31
Introduction
A nation’s international monetary power is intrinsically linked to the extent of cross-
border usage of its currency: the highly uneven international distribution of monetary
power mostly derives from the highly hierarchical structure of the global monetary sys-
tem in terms of currency internationalization (e.g. Andrews, 2006; Chey, 2012; Helleiner
and Kirshner, 2009). Cohen (1998: 114) characterized this hierarchical structure as a
‘currency pyramid’ — ‘narrow at the top, where a few popular currencies circulate;
increasingly broad below, reflecting varying degrees of competitive inferiority’. The
eruption of the global financial crisis in 2008 has left this hierarchical structure of
the global monetary system mostly intact. Table 1 shows that the dollar continues to be
the top currency in international finance, whereas the euro remains a distant second,
when we look at the shares of these two currencies in foreign exchange reserves, inter-
national debt securities, loans and deposits. Yet, despite the institutional deficiencies of
the Economic Monetary Union (EMU) laid bare by the crisis, the euro continues to be the
most important rival of the dollar in international currency competition. Furthermore, the
crisis pushed the Eurozone countries to implement substantial reforms to make the euro
sustainable in the longer term. As Helleiner (2015: 234) notes, ‘If these [reforms] are
successful and the Eurozone became an “embedded” currency area, the euro’s capacity
to grow as an international currency would be bolstered considerably’.
By drawing on chartalist insights and recent scholarship on the scarcity of ‘safe assets’
in the global economy, I argue that the EMU’s reforms and changes in its monetary and
fiscal policy institutions and policies have been too restrictive to boost the international
role of the euro. My argument contradicts a central hypothesis in the literature on cur-
rency internationalization, which states that relatively conservative monetary and fiscal
policies are a prerequisite for establishing and maintaining international currency leader-
ship by bolstering foreign confidence in the stability of the currency (e.g. Chey, 2012;
Helleiner and Kirshner, 2009; Walter, 2006). In this regard, the Eurozone’s relatively
Table 1. Share of euro/US dollar in international finance.
2003 2005 2007 2009 2011 2013 2015
Forex reserves
Euro 22.6 22.6 21.1 22.7 21.9 20.7 19.9
US dollar 68.5 68.2 69.6 67.3 65.9 65.6 64.1
International debt securities
Euro 28.7 29.5 27.6 26.4 23.2 21.4 22.7
US dollar 45.6 45.2 48.5 50.5 54.5 58.8 60.3
International loans
Euro 25.2 25.1 23.8 24.3 25.2 22.0 21.9
US dollar 54.1 54.7 54.4 55.8 54.8 56.3 57.7
International deposits
Euro 27.8 26.5 21.5 22.9 24.4 22.9 24.8
US dollar 52.2 53.9 58.5 58.0 58.4 57.9 56.5
Source: European Central Bank.
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