If Europe is to capitalise on the demise of US dollar (USD) dominance, then it will have to move faster on a number of fronts – solving an energy crisis, increasing defence spending and encouraging a stronger long-term investment and savings culture among its citizens.
These were the conclusions of a panel of policymakers and asset managers that formed the opening session at the European Investor Summit, held by Societe Generale Securities Services in Paris.
At the turn of the century, USD represented 75% of global reserves, equivalent to $16 trillion. However, today this percentage is closer to 58%.
But, despite the statistics, talking about the USD’s demise may be premature, said Dorothee Rouzet, chief economist of the French Treasury. “In Europe, some like to look at the erosion of the USD and what happened in April (after Liberation Day) and think this is the end of the USD. But there is a lot of inertia in the system.”
The USD is also embedded in more than just reserve currencies, said Rouzet. Global commodities and most global trade (apart from the EU) is priced in USD. “The dollar is the reference currency of invoicing and commodity pricing. The Euro is the second international currency, but its share is stable and has not been rising,” said Rouzet.
The second question is whether Europe is prepared to do what it takes to have a dominant currency. “It is an exorbitant privilege but also one you have to pay for,” said Rouzet. “It provides political influence, less currency volatility and cheaper borrowing costs but you also have to pay the cost in times of crisis.”
The euro is also missing a number of key characteristics – it is a large market with predictable economic policies and an open capital market. But it is not a unified area militarily or politically or financially, noted Rouzet. “We do not yet have a unified financial market in Europe that is deep or liquid enough to serve as a reserve currency. And that will take time to change.”
According to Fabiana Fedeli, chief investment officer, equities, multi asset and sustainability at M&G Investments, the USD is still the only currency with deep enough liquidity to be the safe haven at a time of crisis. And while there are other safe havens, such as gold and even digital assets, there is no equivalent currency.
“The elephant in the room is the RMB but that is a closed market and that won’t change politically,” said Fedeli.
The digital assets market has been held up as another potential alternative to USD dominance but again Europe looks likely to be following the US in the development of tokenization, stablecoins and other digital assets, said Antonio Cavarero, head of investment at Generali Asset Management, who described tokenization as a ‘superpower’ and himself as a digital assets ‘convert’.
“I was originally sceptical about cryptocurrencies but now I see it as the beginning of a new ecosystem. It is able to attract new capital and will add money to the US system so every asset manager should be looking at this,” said Cavarero.
The US is working on the infrastructure, providing a legal framework for both stablecoins and digital assets via the Genius and Clarity Acts respectively, said Cavarero. “So it may be that any ecosystem that is developed in EU will be based on US technology and infrastructure.”
