Geopolitics and the monetary system
by Paul Tucker
The international monetary and financial system is being transformed in the wake of the 2007-09 crisis and, separately, by the emergence of a new geopolitics. This was probably the last global financial crisis where the subsequent reform agenda was framed largely via deep transatlantic relationships.
Many of the rising economies already have a seat at the table, via the G20. Next time round, they will be active, perhaps leading, participants.
And next time, we might, for the first time in well over a century, live in a world with parallel reserve currencies – and with the major banks and other globally active intermediaries domiciled across the whole world rather than, as now, largely in the US, the UK, Switzerland, France and Germany.
New reserve currencies might emerge alongside the dollar, seen in the infrastructure to support renminbi transactions and trading outside China, and in the currency’s addition to the Special Drawing Right. It would be surprising if China did not entertain such thoughts or plans.
Much is made of the world reserve-currency issuer’s ‘exorbitant privilege’, in terms of geopolitical returns and reduced funding costs. To that standard list should be added its value as an economic shock absorber and, therefore, domestic political insurance policy.
By enjoying reduced funding costs as the world rushed to buy treasuries, the dollar’s pivotal status helped America weather its biggest domestic economic and financial crisis for nearly 80 years. This effect must have been noticed in the capitals of the rising economic powers.
The dynamics of geopolitics
The future international monetary system, and the possibility of a multipolar reserve currency world, will be determined by, and influence, the dynamics of geopolitics.
There are four broad possibilities. The first scenario is for a dollar system under a modified Washington consensus. Continued dollar centrality is most likely if the US economy performs well, and if the US exercises its power prudently.
Performing well includes continuing to be the world’s engine of technical innovations that drive productivity improvements. It includes avoiding boom and bust, especially another US-led global crisis. It also requires long-run fiscal and external sustainability, so that the US can sustain the costs of a Pax Americana in international defence and security.
Second, in a tense world, we could see rival reserve currencies and overlapping zones of influence. The public good of a single numeraire and common medium of exchange for international economic activity would begin to unravel.
The US and China might vie for economic and political influence. Asian currency politics would become ever more entangled with the territorial politics of the South China Sea and with the development politics of Africa and Latin America. The main currency issuers would reward allies with currency swap lines, and would seek to tie others by encouraging wide use of their currency. It would be a world of fierce competition for placements and patronage within the main global institutions.
Third, and more benignly, a more balanced multipolar system could emerge in which a number of other countries, as well the two economic superpowers, are successful enough to sit at the top table. These might include India, conceivably Indonesia, Mexico and Brazil.
There would be a question about European representation. Germany is unlikely to be big enough on its own for top table membership, so Europe as a whole would have to be a success, requiring profound reforms in its monetary union.
As with the first scenario, the international monetary rules would require adjustment. Leadership of international institutions would either rotate amongst the top table powers or move to the second level of countries that were big but not amongst the biggest.
The fourth scenario would be a dangerous and impoverished world of retreat to economic and financial protectionism, even autarky. The great powers, few or many, would struggle for strategic and military supremacy as the economic and civilising benefits of international trade eroded.
No one would design or plan for this world, but we could slip into it. History will remember favourably the anti-protectionist sentiments of the G20 summits held in 2008 and 2009. But it takes work to hold that position.
Creeping capital controls
Some of that is technical. Solutions to the problem of ‘too big to fail’ financial institutions will need to be truly embedded and executed. Unless macroprudential measures can insulate relatively small open economies from violent capital flows, capital controls will creep back in.
Unless monetary policy-makers can convince politicians that, with floating exchange rates, monetary easing is not a form of currency war, such controls could become attractive to big economies too. Of those four scenarios, the first and the third are more attractive. Whatever happens, geopolitics and the monetary system will be intertwined.
Decades pass during which international monetary affairs and foreign policy proceed in largely parallel universes, when the international balance of power and the institutional structures behind it are broadly settled. Over the next quarter or half century, that is unlikely to be the case.
■ Sir Paul Tucker is Chair of the Systemic Risk Council, Fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School, Harvard University, and a former Deputy Governor of the Bank of England. This text is taken from the 2016 Tacitus lecture ‘A New International Monetary System In A New World Order’. For more details about the lecture see www.world-traders.org/tacitusPastLectures.php Back