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Why the Euro Won’t Replace the Dollar

Posted July 25, 2008

“A more immediate concern is the growing divergence of European economies. Two big European economies, Italy and Spain, are perceived as more risky than the two core members of the Eurozone, Germany and France.” — Lord William Rees-Mogg

by Lord William Rees-Mogg

Baltimore and London — (TFN):  In the last year, the euro has decisively outperformed the dollar and the pound. Some commentators have argued that this means that the euro is the currency of the future, and that the dollar has been relegated to second place. However, there are problems about this argument.

The United States is incomparably the stronger defence power; indeed the U.S. is now the only defence superpower in the world. As Britain found at the height of imperial power, it is not always easy to convert defence capacity into financial strength. Nevertheless, it was the sails of the British navy that maintained world peace in the nineteenth century and made the gold standard possible.

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In 1797 the Napoleonic War led to the suspension of gold convertibility, which was not resumed until after the Battle of Waterloo in 1815. Gold convertibility was again suspended in 1914, on the outbreak of the First World War. Britain was able to maintain gold convertibility for the hundred years of relative peace, which allowed the industrial revolution to spread around the world. In the 1860s, the United States had to suspend gold convertibility, during and immediately after the Civil War. The euro is now protected by U.S. defence capacity.

A more immediate concern is the growing divergence of European economies. Two big European economies, Italy and Spain, are perceived as more risky than the two core members of the Eurozone, Germany and France. Read on to learn why.

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Posted by Lord William Rees-Mogg · Filed Under International Investing 

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