“Europe is a museum, Japan is a nursing home, China is a jail, and bitcoin is an experiment.” These were former Treasury Secretary Lawrence Summers’ now classic words to investors at a 2023 Morningstar Investment Conference.
Summers was talking about global monetary conditions and the necessity to hold your investments and money in some currency, somewhere. “I would rather be playing America’s hand than any other country in the world… you have to put your money somewhere, and the dollar is a good place to put it.”
The US dollar is the least-dirty shirt.
I can’t verify whether Christine Lagarde, the president of the European Central Bank, or any member of her staff was in the audience, but they certainly didn’t get the memo. European policymakers have a long history of gaslighting their population. With straight faces, they tell untruths and just assume that their subjects will follow along — and to our massive discredit, we mostly do.
In June, Lagarde was out swinging in the Financial Times. Somehow she, or her advisors, are under the impression that this is Europe’s moment. With President Trump holding the US on the ropes and the dollar in retreat, the excellently planned and flawlessly governed supranational creation, the euro, is the go-to replacement.
Or not.
There are some obvious things to invoke here: snake oil salesmen and that Upton Sinclair quote about not understanding something when one’s salary (in the $500,000 range) depends on it… but I digress.
The op-ed in the Financial Times goes on to explore how “economic strength is the backbone of any international currency.” A dispassionate observer would soon disqualify the eurozone, having flirted with recession and growth around zero percent for years, the world’s worst fertility prospects, record-high electricity prices, no energy sovereignty — and just over a decade ago was on the precipice of falling apart under the heavy weight of government profligacy. Most people don’t realize that the American and euro area economies were roughly about the same size in the 1990s, and again around the global financial crisis, but that the US economy is now some 77 percent larger. By most accounts, economic life — “strength” — is better in America, no matter what strange ideas come over orange men in white houses.
Even by the old-world standards of low and stable inflation, and deep and reliable capital markets, the eurozone vastly underperforms America. America’s bond market is at least twice the size of Europe’s fragmented and disjointed one, its equity markets some 6-7x larger. David Hebert on these pages asks the correct question: “Why Are There No Trillion-Dollar Companies in Europe?” Financing, entrepreneurship, and regulatory hurdles are some obvious answers, but also that “the US remains a top place for workers and businesses to locate. Our system promotes businesses and the creation of job opportunities in a way that is the envy of the rest of the world.”
For start-ups, too, the grass is much greener in the US: fewer regulatory burdens and much better access to capital. Some of the most successful European tech companies, from Klarna and Spotify to (British!) Wise opted for New York over Stockholm, Frankfurt, or London. One astonishing statistic speaks volumes about Museum Europa’s dynamism, money, and capital markets: “No EU company founded in the past 50 years has a market capitalization exceeding €100 billion, while all six US companies valued above $1 trillion were created during this period.” (We could quibble about the Dutch ASML or Denmark’s Novo Nordisk, but the point stands…)
In a quiet dig at the US, Lagarde tells us that Europe has much better independence for its monetary authority (kind of a low bar…), inclusive decision-making and “checks and balances.” The very next paragraph undermines that commitment: “A single veto must no longer be allowed to stand in the way of the collective interests of the other 26 member states,” and fewer vetoes “would enable Europe to speak with one voice” — i.e., overrule rowdy states.
The worst bit is when she’s pointing to “strategic industries” like green technology, which are neither strategic nor even “industries” — rather, implementations of dying, subsidized ideological dreams.
All Europe has to offer the world is professional soccer and nursing homes; centuries-old architecture and over-regulated, tourist-infested beaches.
To believe that the euro will play a larger role in international monetary affairs is laughable. To the very small extent that asset managers and foreign currency reserves are shifted away from dollars, they’re replaced not by euros (or pounds) but by smaller, non-traditional currencies. Financial institutions skeptical of global monetary hegemony are stocking up on gold (and bitcoin) — not the regional money upstart that Lagarde oversees.
While the dollar’s dominance has fallen steadily in the aftermath of political turmoil, the runaway fiscal train, and the freezing of Russia’s reserves, it’s still miles ahead of the euro. Some 58 percent of foreign currency reserves are in dollars while the second-best “alternative” sits, unmoving, at below 20 percent — far, far from Lagarde’s ambitions.
What’s worse is that the kind of states, institutions, and individuals in need of de-dollarization would achieve nothing by euro-izing. States and money managers in China, Russia, or India would gain zero political diversification by holding euros instead of dollars; in fact, Russia did, as most of its frozen reserves were custodied at Euroclear and European banks. All a shift from dollars to euros would do is replace governance, inflation, and confiscation risks associated with fickle American leadership with the exact same risks in a European format. Hooray.
“No matter its other virtues, by aggressively weaponizing the global currency you issue, you make it worse,” I wrote about the dollar last year. Such matters certainly count against Uncle Sam and the dollar as global money…but the Europeans are even worse.
While Lagarde’s war on cash has been a little overblown, there are invasively constrictive rules capping cash usage at €1,000 ($1,160) in Spain and France, with a €10,000 ($11,160) cash limit applying across the European Union by 2027.
Cries for the dollar’s imminent collapse are always overblown, but the euro as a reasonable replacement is an even more hyperbolically deluded idea.
Lagarde should have been reading the other noteworthy British newspaper, The Economist. The headline from February this year? “Europe Has No Escape From Stagnation.”
Sorry, Christine.
