International Monetary System: How long will the dollar dominate?

The latest annual report of the Global Agenda Council on the International Monetary System presents a sobering assessment of the state of the world in mid-2012.

The economy is slowing down again – not everywhere – but the slowdown is already widespread enough to be self-reinforcing. And the public policy responses have so far been inadequate.

G20 summits, after early promise, have become disappointing, with a lack of clear leadership on display. The US remains preoccupied with domestic fiscal issues and the euro area has repeatedly failed to present a durable solution to its continuing debt crisis.

So instead of evolving towards a more balanced multi-currency system, as many have forecast, the dollar remains the de facto global currency. The euro has not become a second pillar and is unlikely to do so in the foreseeable future. The yen is held back by Japan’s high debt and stagnant domestic economy. The internationalization of the Chinese renminbi (RMB) remains at an early stage.

Will 2012-2013 be as disappointing as the last year has been? We must hope not. There are some reasons for optimism. Recent and forthcoming elections, in France and the US in particular, will give their leaders new mandates. The leadership transition in China will also be significant and may allow the new team to be somewhat bolder once they have their feet under the table. So there are grounds to hope that next year’s G20 meeting in Germany will be more successful and will push forward some concrete initiatives.

Surely the EU will find a more durable solution to its problems soon? The alternative is unpleasant to contemplate. And the markets are developing fast. Who can say how quickly RMB business will grow, especially with some encouragement from the Chinese central bank?

The Council will watch these trends carefully and once again put forward constructive suggestions for global leaders, both political and commercial. In the absence of a clear consensus on the future of the international monetary system, there is clearly an important role for an expert group, bringing together leaders from international organizations, regulators, academics and corporate executives to try to identify new solutions.

This is only one of the many Global Agenda Councils. We invite you to read our full reports.

Author: Howard Davies is a Professor of Practice at the Institut d’Etudes Politiques in Paris.

Image: Foreign currency traders work inside a trading firm behind the signs of various world currencies, in Mumbai May 24, 2012.