Enlargement and the international role of the euro¹

How will enlargement of the European Union (EU) affect prospects for the euro as an international currency? Previously, I have argued that Europe’s joint currency is fated to remain a distant second to America’s greenback long into the foreseeable future because of three structural factors – relatively high transactions costs, due to inefficiencies in Europe’s financial markets; a serious anti-growth bias built into the institutions of Economic and Monetary Union (EMU); and, most importantly, ambiguities at the heart of the monetary union’s governance structure. In this paper I extend my earlier analysis, focusing in particular on the impact of enlargement on the governance structure of EMU. From the start, internationalization of the euro has been retarded by a lack of clarity about the delegation of monetary authority among governments and EU institutions. The addition of a diverse collection of new members, with significantly different interests and priorities, can only make the challenge of governance worse, exacerbating ambiguity at the expense of transparency and accountability. Enlargement will diminish, not expand, the euro’s attractiveness as a rival to the greenback.