Minarets and Money: Anger in Europe and the Future of Monetary Union

Of the trends in international affairs in the wake of the global financial crisis, much has been made of the status of the dollar as the world's premier international reserve currency. Many view the accumulation of dollar denominated assets in foreign central banks as a catalyst for overinflated U.S. housing prices and the subsequent global financial turmoil.¹ Yet the dollar's critics have difficulty proposing an alternative to the dollar for international foreign currency reserves. The Swiss franc and British pound sterling, though important currencies in the world market, fail to have the requisite circulation size to supplant the dollar as a widely held foreign reserve.² The Chinese renminbi and Japanese yen, though more appropriate in circulation size, fail to have the government support required to serve as a major reserve currency.³ This leaves the euro as the one obvious competitor to the dollar. The rise of the euro to preeminence as a reserve currency would be the ultimate realization of the vision of the euro's founders. Yet in the United States, its rise would also result in a drastic devaluation of the dollar, and put substantial constraints on U.S. fiscal policy by limiting the U.S. ability to borrow abroad.

While many forecast doom for the future of the dollar, seemingly unrelated but noteworthy political trends in Europe shed doubt on the euro's ability to usurp the role of premier international reserve currency. Right-wing populist political parties in Europe have received new life from growing cultural tensions and resentment towards immigrants, as recently demonstrated by the minaret ban passed in a Swiss referendum in November 2009. Though Switzerland has not been active in the European integration movement, the ethno-nationalist sentiments and growing distrust of political institutions that underlie these political trends do not stop at the Swiss border. Waves of workers frustrated by their current government establishment have provided historical strength to right-wing populist parties such as France's Front National, Belgium's Vlaams Belang, and the Freedom Party of Austria, all of whom, in addition to advocating strong anti-immigration legislation, have opposed the erosion of national sovereignty through European integration.⁴

Celebrated Harvard economist Martin Feldstein predicted in a 1997 article in Foreign Affairs that the advent of the Economic and Monetary Union (EMU) of the European Union would result in war and destruction in Europe.⁵ But after more than two years of financial turmoil, the euro remains relatively strong and that prospect seems impossible. The European Central Bank's response to the crisis was not without the typical amount of controversy surrounding a central bank besieged with panic, but it was not pulled in opposite directions by nationalist forces within any particular EMU member nation.

Yet major tests still lie ahead for the euro. Though some EMU economies, Germany's in particular, have shown resilience in the economic crisis, other EMU members have struggled. The concerns in early 2010 over Greek, Spanish, and Portuguese sovereign debt remind investors that the specter of a default remains alarmingly high. After nearly a decade of economic convergence, domestic economic indicators have begun to disperse in the euro area since the advent of the crisis in 2007.⁶

In light of these discrepancies, it seems likely that political opposition to the actions of the European Central Bank will soon rise in at least one if not more nations of the euro area. It will be no surprise if conservative nationalist parties are leading the fight against the political independence of the European Central Bank (ECB) and the continuation of monetary integration, much as the most vehement political opposition to the U.S. Federal Reserve has originated in the U.S. domestic conservative movement. Thus far in Europe, right-wing populist parties have primarily drawn their strength from nationalist support for anti-immigration policies. Yet should this anger in Austria, France, Germany, or Belgium spill into frustration with economic accommodations to countries further from the heart of Europe, such as Ireland, Portugal, or Greece, right-wing parties such as France's...