EUR: The “reserve currency curse” - Natixis

Patrick Artus, Research Analyst at Natixis, explains that they begin with the “Triffin paradox” described by Robert Triffin in 1960: the United States issues a reserve currency, which forces it to have an external deficit and external debt, since it must be able to supply assets in dollars for investors in the rest of the world.

Key Quotes

“The resulting increase in the US external debt then erodes the quality of the dollar and leads to financial vulnerability, hence the “reserve currency curse”.”

“The euro is also a reserve currency, but the euro zone has neither an external deficit nor external debt. This means that financial assets in euros are not available to be bought by non-residents, whereas they ought to be, given the euro’s reserve-currency status.”

“As a result:

• As soon as the world accumulates foreign-exchange reserves and the economic and political situation in the euro zone is no longer a concern, the euro appreciates sharply;
• There is a positive correlation between oil prices and the euro’s exchange rate, as a rise in oil prices leads to an increase in demand for euros in oil-exporting countries.”

“It is therefore important that the euro zone’s political and economic authorities understand that the euro’s reserve-currency status is incompatible with the euro zone not having external debt, and that this situation generates a structural overvaluation of the euro’s exchange rate.”