Professor Kurt Hübner, Jean Monnet Chair for European Integration and Global Political Economy and the Chair for German and European Studies at the Institute for European Studies, University of British Columbia, Canada
15 Apr 2011
Academy of Singapore Teachers
Speaking at a workshop jointly organised with the Ministry of Education for teachers of economics, Prof Kurt Huebner (EUC Visiting Fellow for April 2011) delivered a lively lecture in which the evocation of time-honoured economic theories was liberally sprinkled with illustrations from the current global financial situation.
Since the end of World War II, the United States has dominated the setting of conventions and norms of the international currency regime. The US dollar has long been the international reserve currency. But with the financial difficulties the US has faced since 2008, are we now indeed in the era of the leaderless global currency regime? Does the euro – given the extent of its usage – stand a chance to become the next international reserve currency? How about the renminbi?
The International Currency Regime, to use economic/social science terminology, was defined as ‘the set of practices, conventions, rules, norms, institutions and policy instruments that produce particular outcomes in regard to exchange rates, capital flows and global balances’. It is concerned with the management of the fluid (and potentially volatile) nature of a system of unfixed currency exchange rates. There is, hence, the need for a leader to ‘set the rules of the game’, and it was the US which filled this role at the close of the last world war. The Bretton Woods system, which came out of this historical moment, may have since collapsed, but the ensuing regime was clearly still US dollar-dominated. This state of affairs has not been disrupted even with the rise of the yen and of currency cooperation in Europe.
Such disruption however was perhaps foreshadowed when the collapse of Lehman Brothers in September 2008, which sparked off a global economic and financial crisis. The US’s economic power and dominance suffered a huge loss. But here lies a paradox – the shift of economic activity and power away from the US is not reflected in a shift away from the dollar. Why so?
The problems in the eurozone have been well publicised. However, it is not exactly for reasons of the EU’s sovereign debt crises that preclude the euro’s contention to be the next international reserve currency, according to Prof Huebner. The euro is here to stay. The drastic changes in the eurozone’s economic mode of governance may not only bring back the euro’s reputation, but may strengthen its architecture. Better auditing and accounting practices across the eurozone, for example, will prevent a repeat incident of Greece severely underestimating its national deficit (a key factor that sparked off market panic when this was discovered). Until these have been fixed, the euro is not able to be the US dollar’s successor.
The inexorable rise of China may suggest that the renminbi could be another contender. But without depthin the Chinese financial sector – due to the lack of sufficient technology to better provide financial services; the slow removal of capital controls – this would remain as an unrealized aspiration.
The global financial system used to be overseen largely by the G8 countries. Then there was the G20 in the aftermath of the financial crisis. Signs now seem to point to a “G0” world. But that should not necessarily be cause for alarm. China with its large holding of US dollars in reserve, for instance, would not want the US dollar to depreciate too much. There is still sufficient vested interest of the currency giants in each other to ensure the public good of currency stability.