Historically, the currency of the mayor economy has played a significant role in the International Monetary System. This was true for the shekel, the daric, and the denarius, as it was for the sterling pound and the U.S. dollar.(1) However, the global economic arquitecture of our days does not resemble the ones of the past, nor even the times in which The Bretton Woods Conference anchored the U.S. dollar as the main currency for International Reserves (IRs). For that reason, the quest for a new main currency for IRs is in the air.
As can be seen in the following chart, today’s reality faces a multipolar economy in which emerging powers, growing at a greater pace, and with more political influence, have gained terrain, such as China and India. In the other hand, the United States faces a critical moment due to their high current account deficits, as shown in the second chart. This last aspect, along with the surpluses of countries like China and Germany, has contributed to the global imbalances(2), and the uncertainty that has widened the world economic crisis. In this scenario, the aim of the French Presidency of the G20 to reform the International Monetary System seems accurate and necessary, but also very challenging; challenging because it requires strong cooperation, compromise and effective implementation.
Up to date, 61 percent of the world central banks IRs are held in US dollars -10 percent less than a decade ago. Most of the rest is allocated in euros, UK pounds, Japanese yen and SDRs, which are international reserve assets created by the International Monetary Fund (IMF) (3). As shown in graph 3, China has the highest amount of IRs -with two-thirds estimated to be invested in dollars. This is relevant because a high amount of IRs can facilitate the incidence of governments in exchange rates and therefore in creating certain stability.
Despite its actual scope, the primacy of the dollar has been questioned due to the uncertainty that the economic situation of the United States has generated. French President Nicolas Sarkozy (4) and Christine Lagarde, now head of the IMF, opened the debate to look for a more stable alternative to the US dollar that could inspire confidence and be widely accepted. As the crisis in Greece and other European Union countries worsens, and the pressure over the inaccurateness of a single European currency grows, the prospective of the euro as a leading currency is significantly narrowing.
The time for a SDRs system is also in the discussion, and Lagarde suggested its enlargement. Until now, its use had been limited, even when notable economists as Joseph Stiglitz signaled it as more desirable system once it had the adequate reforms. Still, the road is not clear for the SDR’s, but it will be quite interesting to see the position of the United States to this respect, as well as China’s, whose Yuan (renminbi) has caused great expectation among the analysts, and of course the one of the representatives of other countries, especially of those that have been struggling with the dollar’s recent high volatility.
At this last respect, it is interesting to analyze the recent behavior of the US dollar. According to data provided by the Wall Street Journal, this year the US dollar strengthened at least against 87 currencies, mostly African, which is why the participation of South Africa as member, and the African Union as guest will be relevant for the debate. The following table shows the most affected currencies, four of which belong to G20 members.
Table 1. Exchange rate X to U.S. dollar, 2011. Elaborated on my own using data from the IMF Data Mapper. Data available in: http://www.imf.org/external/datamapper/index.phpThe interdependence of our world makes itself evident with the presented data, and it shows how the decisions of some countries and the behavior of their economies can affect others. Of course, there are degrees, and not all are equally distressed by global changes, but the information regarding exchange rates let us see that solutions will have to come from cooperative frameworks. As an example of this interconnectedness, the Mexican case is clarifying. This country is a G20 member, it has one of the largest GDPs in relation to Latin America and has been affected by the US dollar appreciation over the last year, especially in September.
This appreciation of the dollar can have several readings for Mexico. In part, it can be considered as undesirable for consumers of imported goods, for people who were planning to travel abroad, for producers who use intermediate imported goods and for people living in the border with the United States(5). As shown in graph 5, Mexico’s percentage of imported goods and services as a percentage of GDP is considerable. This means that there is a relevant amount of sectors affected by the US dollar strengthening and volatility which should be taken into account.
Nonetheless, for exporting companies, whose products become cheaper in relation to the foreign, and for national tourism this appreciation could be considered an advantage (6). Also, as can be shown in the following graph, the amount of exports of goods and services exceeds a quarter of the GDP which means that for certain sectors the appreciation of the dollar might be good news. The situation is complex, but what is important is to understand that many economies are tied to the behavior of the dollar and that stability must be a priority.
In conclusion, the current account deficit of the United States, the surpluses of emerging economies, and the European crisis, account for a new configuration of the world; one in which every country is interconnected to the others and in which certainty and stability are key. The US dollar continues to be the leading currency for IRs, but the recent fluctuations of its currency affected various countries all over the world, making visible the power it has to unstable the whole economic system. For this reason, the discussion of a new IRs –namely supranational- or a wider array of them should be taken into account, and the perfect place to do it will be the International G20 Summit to be held in Cannes.
Notes:
(1) Robert Mundell, “The International Monetary System in the 21st Century: Could Gold Make a Comeback?”, Lecture delivered at St. Vincent College, Pennsylvania, 1997. Available in the following internet address: http://www.columbia.edu/~ram15/LBE.htm (website visited on September 29th 2011).
(2) Global Imbalances in Midstream. Document available in the following internet address: http://www.imf.org/external/pubs/ft/spn/2009/spn0929.pdf
(3) Global Finance: International reserves by country, 2010. Available in the following internet address: http://www.gfmag.com/tools/global-database/economic-data/10212-international-reserves-by-country-2010-ranking.html#axzz1ZNyq3mlg
(4) “We have to update the international monetary system for the 21st century,” Sarkozy said at the G-20 summit in Seoul. At the WEF in Davos, he said: “We can’t have on one hand a multipolar world and on the other hand a single reserve currency”.
(5) Gerardo Ezquivel, ¿Qué pasa con el dólar?, Animal político, 2011. Article available in the following internet address: http://www.animalpolitico.com/blogueros-el-vaso-medio-vacio/2011/09/26/%C2%BFque-pasa-con-el-dolar/
(6) Ezquivel, op cit.
Notes:
(1) Robert Mundell, “The International Monetary System in the 21st Century: Could Gold Make a Comeback?”, Lecture delivered at St. Vincent College, Pennsylvania, 1997. Available in the following internet address: http://www.columbia.edu/~ram15/LBE.htm (website visited on September 29th 2011).
(2) Global Imbalances in Midstream. Document available in the following internet address: http://www.imf.org/external/pubs/ft/spn/2009/spn0929.pdf
(3) Global Finance: International reserves by country, 2010. Available in the following internet address: http://www.gfmag.com/tools/global-database/economic-data/10212-international-reserves-by-country-2010-ranking.html#axzz1ZNyq3mlg
(4) “We have to update the international monetary system for the 21st century,” Sarkozy said at the G-20 summit in Seoul. At the WEF in Davos, he said: “We can’t have on one hand a multipolar world and on the other hand a single reserve currency”.
(5) Gerardo Ezquivel, ¿Qué pasa con el dólar?, Animal político, 2011. Article available in the following internet address: http://www.animalpolitico.com/blogueros-el-vaso-medio-vacio/2011/09/26/%C2%BFque-pasa-con-el-dolar/
(6) Ezquivel, op cit.
