Todos querem escapar de Bretton Woods?
What the future holds for the monetary system
Since its launch in 1944, the USD-centric monetary system has undergone radical change, typically in response to "systemic" crises such as major shifts in US monetary policy that generated stresses outside the United States.
In recent years, the changes in the global economy, economic policy responses, and the geopolitical situation have triggered hefty reactions in financial markets, including money, bond, and foreign exchange markets. They have also raised the question as to whether the international monetary system may be subject to more long-term and fundamental changes.
In which direction is the monetary system heading?
It seems as if a gradual evolution to a more multipolar monetary system is the most probable outcome, with a more extreme turn away from the USD-centric system being much less likely.
Two unlikely scenarios: A common global currency or a different currency hegemon
1. Creation of a common global currency remains illusory
Proposals for a world currency have not materialized and, in the current geopolitical setting, are now even less likely. Put simply, handing over the power to print money from your own central bank to a supranational authority requires enormous mutual trust among countries and an intensely cooperative geopolitical environment.
2. Lack of an alternative currency hegemon
How about a currency other than the US dollar to take on a similarly dominant role in the global monetary system?
There are two regions that are similar in economic size to the United States, and which by their scale might in principle qualify: the euro zone and China.
- Euro zone
The euro now accounts for around 20% of global FX reserves – the second largest share behind the US dollar – and is also freely tradable across borders. And yet, euro zone policy makers are clearly not striving for their currency to take on such a role; indeed the focus of the European Central Bank (ECB) remains very much on the domestic economy.
The euro zone is still not a mature fiscal union and therefore lacks a region-wide safe asset like US Treasuries. This means there is no highly liquid and uniform asset that the rest of the world could hold as a reserve. The lack of an integrated capital market and banking union are further roadblocks, reducing the liquidity of the euro.
Global foreign currency reserves
Source: Hasver, IMF, Credit Suisse
- China
In contrast, China is a single fiscal entity and its few large banks can be regarded as money center banks. However, the renminbi lacks the third key characteristic which would qualify it as a competitor to the US dollar: international capital mobility. For the foreseeable future, it seems improbable that China will fully liberalize and open its financial markets for cross-border transactions. Other features, such as an internationally recognized legal system, also argue against the renminbi as a viable candidate for a dominant currency.
The creation of a truly new global currency, or the rise of an alternative "hegemonic" currency is, in our view, very unlikely in the foreseeable future.
So, what might a future monetary system look like in the absence of either a new world currency or a full replacement of the US dollar as the lead currency?
Gradual evolution of a more multipolar system
Essentially we see a new, more multipolar system evolving as a result of three drivers:
1. the trend increase in bilateral trade among many countries, allowing for returns to scale in the use of their respective currencies rather than the US dollar;
2. deepening of local capital markets in emerging markets; and
3. efforts (especially by leading emerging markets) to develop mutual insurance schemes against shocks resulting from shifts in US monetary policy.
Transactions in emerging market currencies are on the increase
Source: BIS, Credit Suisse
Since the financial crisis of 2008 we have seen efforts to increase the robustness of the monetary system and better protect emerging markets from the stresses that arise from the US dollar-centric system.
This means the world has gradually been moving toward a more multipolar currency system. The question is whether this process will continue in a fairly smooth manner, or whether we might see abrupt moves in one or the other direction.
