US Dollar Sovereignty, the Euro, and Quantitative Easing

The Advantages of National Currency Sovereignty

There are several advantages for a nation to have its own currency. The biggest advantage is probably that it allows a nation to print more money, which can help it avoid debt default (Wood, 2011). This is tied to broader questions of sovereignty — and especially fiscal and monetary sovereignty — where a nation can manage the value of its currency and use it as a means of influencing trade, and by extension its broader economy (Wood, 2011).

Having one's own national currency also provides control over interest rates, inflationary pressures, and export competitiveness. These tools collectively give governments and central banks the flexibility to respond to economic shocks in ways that nations sharing a common currency simply cannot.

The Eurozone's Structural Weakness

In Europe, where most nations use the euro, the absence of these advantages became a critical issue during the recession of 2008–2009. Several smaller Eurozone nations faced high debt loads but were unable to act on them. The reason is that the Eurozone economy as a whole is driven primarily by three large industrial nations — Germany, France, and Italy. Those nations, Germany in particular, had fairly robust economies, such that the euro remained relatively strong.

Normally, a nation facing economic slowdown would seek relief by reducing the value of its currency. Such a tactic would accomplish two things: it would make it easier for the country in financial distress to service its debt and avoid default, and it would allow its exports to be more competitive on the global market. Some countries were able to employ this approach to kickstart economic growth, but the smaller Eurozone nations were not. The condition in those countries was one of acute fiscal distress, with stagnant or shrinking GDP, a high risk of debt default, and high interest rates reflecting the overall strength of Europe — strength driven by Germany and other northern nations. The lack of what is known as devaluation liberty left many southern countries far less equipped to manage their economic crises (Seth, 2015).

Paul Krugman (2011) points out that if interest rates and currency values are incapable of making the necessary adjustments to return a country to equilibrium, that has other implications. It means that adjustments must happen elsewhere in the economy. In the case of Spain, a housing boom had produced rapid wage inflation, and with the bust it was wages that needed to fall in order to restore equilibrium. If a country lacks its own central bank, economic adjustments will still occur, but the government will have less control over how, when, and where those adjustments take place — which likely means more economic chaos.

Further, a country without a central bank or its own currency might prefer to adopt economic policies that reduce overall risk, in order to avoid scenarios like those experienced by Spain or Greece. Lower aggregate debt levels would be a good starting point, as would encouraging the development of more stable, less cyclical industries. Many southern European nations saw their economies boom and bust with real estate — a traditional source of volatility when not closely tied to underlying job markets. Consequently, policies that governments can influence will shift toward encouraging a lower-risk environment. The United States, by contrast, need not adopt such risk-averse policies, which helps it pursue strategies that encourage innovation, risk-taking, and robust economic growth.

US Monetary Flexibility and Long-Term Borrowing

The United States, having its own currency, was able to hold interest rates lower for longer during the recession. Lower rates encouraged investment, and as a result the US was able to exert greater control over its economy, at least in terms of monetary policy. Where Eurozone countries lack the flexibility to manage the value of their currencies, the US retains this ability. As such, the US exercises more sovereign control and is not beholden to the economies or interests of other nations. Whatever policy the government and the Federal Reserve wish to pursue with respect to the US dollar, they are free to do so.

There are additional advantages to having one's own currency. Some nations have high interest rate sensitivity, based on the level and structure of domestic borrowing — something normally determined at the national level. For countries on a common currency, however, the ability to manage interest rates must account for the needs of a common central bank and the other economies within that currency union. Greece and Spain, for example, have high interest rate sensitivity but very limited ability to influence the European Central Bank when it comes to setting rates that directly affect their economies (Seth, 2015).

Managing inflationary pressure is also typically achieved through interest rates. The European Central Bank might raise rates to combat inflationary pressures in the north, but this will suppress economic growth in the south. The US faces a somewhat analogous issue: if coastal economies are strong, the Fed might raise rates and inadvertently hurt more struggling economies in smaller states. Viewed at the national level, however, the US as a whole and the individual countries of the Eurozone are comparable in the sense that they each enjoy the same internal sovereignty. The difference is that European countries without their own currency will struggle if interest rate policy does not align with their needs, but instead aligns with the very different needs of larger neighbors.