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In mid May, 2010, European Union leaders approved a rescue package worth 750 billion euros (nearly $1 trillion) to buttress weaker states such as Greece, Portugal and Spain.  The funds were contributed by state governments on account of resistence to the EU itself raising the money through direct taxation in the states using the euro as their currency. In early 2011, Sarcozy and Merkel proposed greater EU coordination of fiscal policies in states using the euro. The proposal was shot down by Belgium's prime minister as a threat to the social agreement in his state. Whereas such resistence to giving the EU more governmental sovereignty is typically highlighted in news reports, I contend that simply having a common currency inexorably exercises a subtle though gradual force in the direction of further integration manifesting in more governmental sovereignty being transferred from the state governments to that of the EU. It is not always easy to see the changing contours of a forest when one is used to studying leaves.

According to David Marsh, the euro was intended to complete the European program of liberalized cross-border trade, promote the old dream of political unity, rival the dollar as an international reserve currency and — the most complicated objective — prevent an enlarged Germany’s domination of Europe by bringing its currency under European control.”  Before the euro went into effect, Chancellor Kohl of the state of Germany noted that a monetary union without a corresponding political union would be “a castle in the air.” His remark echoed the concerns of the Bundesbank, his state’s statutorily independent central bank, that unless there were greater political and economic anti-inflationary discipline and solidarity among weaker and stronger states, the monetary union would be doomed. I contend that this pressure for greater solidarity or coordination via EU governmental institutions is a pressure that is inherent in the monetary union, whose gravity pulls the EU toward further integration until the equilibrium point (with the monetary union) is reached.

To be sure, the EU was at a precarious place in 2010 amid the debt crisis and the attempt by the EU collectively to come to the rescue. Even though EU institutions had acquired a significant amount of governmental sovereignty, it was less than what was being required in responding to a common currency in trouble. A currency in any federal system requires some degree of fiscal consistency among the governments subject to the currency.  In the want of adequate means, the government representing the system as a whole can over-react out of sheer frustration. Beyond the emergency fund, for example, the EU Commission wanted the state governments to submit their budgets for approval before appropriating funds. This would have represented more political consolidation than is the case in the US. Euroskeptics would have hit the ceiling.

To the Europeans who deny the political or governmental aspects at the EU level (i.e., the ECJ, the EU Parliament, and the EU’s various political offices), fiscal coordination represents an infringement on the “national sovereignty” of the “member states.”  Even so, the need for greater fiscal coordination or consistency for the euro inexorably backs the even the Euroskeptics the uncomfortable position of agreeing to more sovereignty being transferred from the states to the union. The invisible integrative forces in monetary union do not bend to denial; instead, they bend it. So while the skeptics might get the headlines today, the extend of union even in 2010 presaged ever closer union even if the pattern involves fits and starts rather than a linear trajectory. In other words, it is best to have a long-term perspective in evaluating the implications of newsworthy events on the EU.

Source: http://www.nytimes.com/2010/05/18/opinion/18marsh.html?hp

Given the $13 tillion amassed in US Treasury debt plus all the debt amassed by the American states, the US dollar was losing out in percentage terms to other currencies as the global reserve currency in 2010. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years ago, but as a report from Emma Lawson of Morgan Stanley shows, other currencies were taking on more of a relative presence.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:
 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd
 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/