The equilibrium in which the dollar is the dominant international currency is becoming more unstable over time as the relative size of the US shrinks in the world economy while the stock of dollar liabilities in the rest of the world keeps growing, according to Helene Rey, Professor of Economics, London Business School.
“Nevertheless, for the run to materialise, one needs one or several credible alternatives to the dollar,” said Rey at the 35th EXIM Bank Commencement Day Annual Day Lecture. “Currently, the euro may be the closest substitute to the dollar as the euro area is comparable to the US in terms of economic size and in international trade, as well as in the level of institutional development,” she observed.
“But the incomplete architecture of the euro area with 19 finance ministries backing the currency and the absence of a euro-area-wide safe assets inhibits the internationalisation of the euro.”
While the transition to a multi-polar system will not happen anytime soon, the euro is already used extensively as a payment currency according to Swift data, and it is a solid second in international reserves, the professor said.
Renminbi
Rey pointed out that the distance between the dollar and the yuan is larger as China still imposes capital control and its financial system is markedly underdeveloped. “But the use of renminbi (RMB) for trade invoicing and cross-border financial transactions has increased in the recent period.
“…Synergies, once they get going, may quickly reinforce the adoption of the renminbi in international markets if adequate supportive policies were pursued in China,” she added.
A game-changer, Rey opined, could be the issuance by China of an eRMB with efficient transaction technologies used for international transaction within a certain network of countries.
While the transition to a multi-polar currency world may get under way, she said much innovation is happening in the realms of private, digital and crypto currencies.
“We are seeing simultaneouslythe emergence of crypto-currencies (such as bitcoin), with many of them using a decentralised blockchain; the possibility of the launch of private monies or stable coins (such as Libra); and the possible creation of public digital currencies (Swedish e-krona),” she added.
Rey observed that the current configuration of the international monetary system may not be stable as the hegemon (US) is shrinking in relative size in the world economy. So, we need to think through the potential changes in international monetary order.
“At this stage it seems plausible to me that the world could turn towards a competition of the main central banks to develop high-tech international payment and settlement systems within a network that they will seek to expand.
“In such digital networks, the lock-in effect could be very strong. Indeed, data about all transactions will be collected by the owner of the system, who could then use them to help enforce its dominance,” she explained.
