Since the US is a single sovereign nation, as opposed to the often-fragile federation of competing sovereignties that is the European Union, foreign investors still have more confidence in US Treasuries than other government bonds.
Now, the US dollar, like most currencies, exists as a result of nation-building, while the Euro exists as a step towards nation-building. The European Union is not yet a state in the full sense of the word. The member states control their own fiscal policies. More importantly, they see themselves as distinct nations. And different member states are growing at varying paces which creates uneasiness and discontentment. Especially the southern four member states, namely Greece, Italy, Portugal and Spain are feeling the strain of the high-priced German-centric Euro on their national economies.
The governors of the European Central Bank have been following the traditions of the German Central Bank. Fighting inflation is their primary goal. That works for a strong, stable economy like Germany. But such economic policies during a downturn might prove too much for the Southern states to bear, presenting them with a Cornellian Dilemma. Leaving or staying in the European Monetary Union, both with ugly consequences.
The Euro was floated in 1999. In its short history so far, it has remained a viable currency but that was during good times. How it fares during the current recession will decide its future. With widening divergences between the EMU’s member states, the pressure on it could become intolerable during a recession. And ultimately this could lead to its breakup. Two possibilities, every nation charting its individual course, or perhaps a Nordic Euro, with the Southern four breaking away.
I wonder if China has already begun formulating a strategy on how to deal with and perhaps take advantage of this possibility.