The underlying situation seems to suggest that the dollars hegemonic role as global currency should be waning in favor of a dollar/euro duality. But Jean Pisani-Ferry and Adam Posen persuasively argue that even though this would be a beneficial scenario, it’s not on track to happen since the eurozone institutional apparatus isn’t there and leadership is lacking:
In fact, the measures needed to secure the euro’s wider role are in the area’s own economic and political interest. Financial integration should be completed and underpinned by solid European supervision; second, the economic governance of the EMU should be strengthened, especially as regards crisis management; third, the euro area should adopt a more proactive strategy to enlargement and stand ready to provide liquidity support to partner countries where its currency is used; fourth, it should strengthen its economic base by raising the rate of sustainable growth.
Does this sound familiar? It is no accident: limitations on the euro area’s productivity, openness and governance are also the factors that limit the euro’s global role. By dodging some of its duties as a regional currency, the euro area constrains the euro’s wider adoption globally. The absence of the euro from talk of dollar alternatives shows that these internal failures also put at risk future monetary stability for the broader world.
One of the issues with the interwar world was that the United States of America didn’t really have the wherewithal to play the role of Mightiest Power on Earth. These days, it seems to be the European Union that’s not quite up to the job of being the world’s most important economy. They’re getting there as a matter of institutional design, but there’s still a long ways to go, and the European Central Bank’s deflationary bias is disastrous. This makes it hard for the world to get out of the economic woods.