Guest Contributor: Dr. Patrick Leblonde, University of Ottawa
Eric Helleiner addresses the future of the dollar, by summarizing some ideas found in a recent book that has just been published by Cornell University Press. According to him, this is an issue that has received a lot of attention in the media. Even policy-makers in the US are concerned about the future of their currency.
He starts off by indicating that predictions of the declining role of the dollar have been made since the 1960s and every time they have been proved false. So this is an important element to remember. But is this time different, as people like George Soros have argued?
It seems that the existence of the euro have fueled this pessimism related to the dollar’s decline. But surprisingly the dollar did not decline at the beginning of the crisis, on the contrary. It actually appreciated because large capital flows coming back to the US, because of the dollar continued to be seen as a safe haven. Another reason is that US banks and investors were bringing their foreign capital back home to cover losses in the US.
But the big change, according to Helleiner, is that other countries are now challenging the role of the dollar as the international reserve currency. For example, the Chinese have been strongly supporting the creation of an independent international currency in the form of SDRs, at least until the renminbi might play an important role in international currency markets in the future.
But international monetary orders take a long time to shift. There are a lot of network externalities in using a currency. If things are not going to change in the short and medium terms, we should nevertheless prepare for the future if the dollar will decline in the long term. First, this requires the Europeans to speak with one voice. Who speaks for Europe? Second, the SDR could be given a more important role but it is still at only 5%, although from 0.5%, but still less than the 9% that prevailed in the 1970s.
For his part, Paolo Guerrieri is quite pessimistic about the short term economic outlook. But how do we make sure that the medium term is going to be sustainable? How do we make sure that there is no further increase in global imbalances? He argues that the global imbalances are interlinked with the development of the international financial system. So both issues need to be addressed together. It is no longer possible for the rest of the world to try to achieve current account surplus because the US is no longer the consumer of last resort. So if we don’t find a solution, then we are bound to have lower economic growth at the world level.
What is needed? According to Guerrieri, we need a shift in the distribution of demand. How can it be done? It is sufficient to say that the US should export more while China should consumer more and export less. We need international cooperation of macroeconomic policies to devise clear rules of the game. The IMF should be the international institution put in charge of making this cooperation possible. The agreement at the G20 meeting in Pittsburgh is thus a step in the right declaration, but more must be done. G20 countries should strengthen the IMF to not only supervise but also lead a coordinated adjustment of monetary imbalances. He concludes by saying that “we could do more and we should do more”.
Gregory Chin comes at the issue of global imbalances from the point of view of China. The Chinese are very clear that they face a very serious challenge with their $2 trillion of international reserves (mostly in US dollars). This is evidenced by their agreement at the G20 meeting that something must be done about macroeconomic imbalances. But for China, it is much more about what is going on at the G20: who is willing to do what?
The Chinese are aware that their country has to do more to stimulate domestic consumption; they cannot continue to rely on US consumers. But the key question for the Chinese leadership was: how? How does it diversify exports? On the consumption side, it takes time to develop domestic consumption when a large portion of the society is still poor, as Alicia Garcia-Herrero pointed out in her remarks earlier. The crisis has finally forced the leadership to focus on the issue and try to find a solution quickly. But they will not do it alone. This is why they signed up to the G20 agreement.
So China has adopted a three-pronged approach: continue to rely on the US but not try to grow it; boost domestic consumption; and stimulate South-South economic flows, both trade and investment.
Another solution is to internationalize the renminbi, which is based on using Hong Kong as a platform to sell renminbi-denominated assets to foreign investors. This strategy will eventually require cooperation with Japan, which has the dominant currency in Asia right now alongside the dollar. This means that if there is no Cheng-MAI+ agreement with Japan, there could be increased currency rivalry in Asia.
In the Q&A part of the session, Paola Subacchi asked about the importance of Germany and Japan. The panel only talked about the US and China but these two countries are important players in currency markets and the world economy more generally. Paolo Guerierri answers that in Germany’s case, the current surplus is mainly with other European countries. As for Japan, its reserves are more diversified than China’s and its holding of dollars is not as extensive. Furthermore, Guerrieri indicates that there is a need for an adjustment mechanism within the eurozone in order to deal with intrazone imbalances.
Mark Warner from the Ontario government asks whether it would not make more sense to focus on microeconomics rather than macroeconomics, especially in terms of flexible labour, goods and services markets. Eric Helleiner answers that it is not clear what determines currency flows and their importance internationally. One element is the transnational commercial networks, whereby the large economies tend to use their own currencies to account for their trade. Hence, it is difficult to change those networks and the currencies that they use. John Curtis adds that according to the latest BIS report, 87% of transactions have the US dollar at one end or the other.
Paolo Guerrieri thinks that macroeconomics is going to go back to viewing the economy in terms of systemic effects rather than as the sum of microeconomics effects.
Gregory Chin asks whether the US has to ask itself whether it has the products that the rest of the world wants to buy. Clearly China and Brazil have such products, but does the US? The Obama administration will have to answer that question. I would be more specific and mention that this it is firms and workers that will decide whether US products are appealing or not, based on in their response to world competition as well as government incentives.
Overall, this was an excellent panel that made it clear that China and the US stand at the core of resolving the issue of global imbalances but that they will not be able to achieve it on their own. Nevertheless, the question of the dollar’s future remains. Will it be replaced as the world’s reserve currency in the foreseeable future? Unfortunately, the panel did not answer this question.