Admit it, the Euro works great

EDITORIAL: "The Euro Decade and Its Lessons," Wall Street Journal, 2 January 2009.

The WSJ calls it "a rare economic shining star of the past decade."

The father of the Euro, Nobel laureate Robert Mundall, says the dollar's rapid rise against the euro, after a year of slow decline, may have triggered the Sept panic, but I think that overstates the causality. To me, euro-dollar dynamics merely reflect larger realities, and that that's the greatest benefit of having a connected balancer to the buck--a recursive environment, as Nicholas Taleb describes it, is created.

Recursive is good, because that means you get signals that you've gone too far. I think we've entered a whole new age of recursiveness based on the intense connectivity we've unleashed in the past couple of decades (Clinton's big achievement). That's the primary benefit of this crisis.

When the euro debuted, it constituted about 18% of the global reserve currencies and the dollar sat at about 71%. Now we're down to about 64% and the euro is up to about 27%. Inevitably, we'll face an Asian basket currency that grabs a similar share--and that will be a good thing.

Comments

[Jeff J]

I thought one of the more interesting items that have come in to sharp relief during this economic tumult is the lack of diversity of demand around the world. Everyone has sought to enter the US market over the years due to our demand pull, as you have noted, helped by easy (too easy) access to credit. Since the US is all tapped out I guess the trick is going to be how fast the demand pull from other core members can be accelerated and further diversified.