Decades before euro can challenge dollar, ECB says Fri 2005-04-15 17:26 ET , By Alister Bull:
WASHINGTON, 2005-04-15 (Reuters) - Don't hold your breath for the euro to oust the dollar as the world reserve currency, a top European Central Bank policy-maker recommended on Friday. But others warned ready or not, the job was heading its way.
"The process of a currency acquiring an international role is extremely slow. It takes decades," said ECB executive board member Tommaso Padoa-Schioppa, adding it was a burden the 12-nation common currency had never sought. Addressing a conference titled 'The euro at five - a global role' about how to make the euro fit to serve alongside the dollar as the leading reserve currency of the 21st century, Padoa-Schioppa warned investors should think in terms of generations. "'The euro at five years' ... maybe for the type of issues studied here it should be five decades not five years," said Padoa-Schioppa, who retires later this year.
Others cautioned the euro may be denied the luxury of time, with the mammoth U.S. current account and budget deficits potentially unseating the dollar as the world's reserve currency and promoting the euro by default. "Ready or not, it's coming. The dollar's decline is coming and we need an additional leader," said Adam Posen, a senior fellow at the Institute for International Economics which was hosting the conference.
His colleague, IIE director Fred Bergsten, noted that in the history of foreign exchange markets, the dominant world currency jeopardized its position through its own mistakes rather than being overhauled by an upstart rival.
MESSING UP? "Are we in the process of messing up?" he said, listing the twin deficits and lack of evidence that U.S. President George W. Bush was serious about curbing government spending. "Do these things portray an abdication by the incumbent of the leading role? If the U.S. continues to ignore its external imbalances and (does) nothing to head it off ... the transition to the euro could happen in a very disorderly way," he said.
The euro's share in official world reserves is still dwarfed by the dollar, which claims about 64 percent of the total versus about 19 percent for the common currency. But as Padoa-Schioppa himself noted, the process of changing the international role of a currency was demand-driven and unpredictable. "The store of value function may change quite fast," he said.
Group of Seven rich nations gather here on Saturday and some will doubtless repeat their standard warning that the U.S. current account deficit, which is above five percent of gross domestic product, risks a dollar crisis. Posen said the euro zone still needed to do a number of things to improve the suitability of the common currency as an alternative to the dollar.
These include improving the bloc's financial market integration and banking supervision. It must also agree on a single euro zone representative in forums like the G7 and the IMF, and get greater support from the ECB for growth. But Padoa-Schioppa rejected any suggestion the euro zone's central bank was at fault for the bloc's modest economic performance since the currency's 1999 launch. "I'm not one of those who think the slow growth in Europe is due to excessively tight fiscal or monetary policy."