OMFIF has declared 2016 ‘The Year of the Multicurrency System’. Diverse currencies are competing for status and clout in a crowded and chaotic monetary world. All the monetary units that from 1 October will make up the International Monetary Fund’s special drawing right – the dollar, euro, sterling, yen and renminbi – are subject to their own set of inherent strains and tribulations. This is particularly the case for the No. 2 reserve currency, the euro, a money that has not yet reached maturity, to the extent that it combines 19 countries that do not (and may never) form a unitary state. The January 2016 issue analyses the trials besetting the European single currency, with articles by David Owen, Athanasios Orphanides, Gus O’Donnell, John Mourmouras and Otmar Issing. The renminbi, under pressure against the dollar in the early days of January, will be the subject of the February edition.
We include our 2016 predictions, from 20 members of the advisory board and other OMFIF associates – ranging over the US presidential election, myriad risks for financial markets, the dollar, renminbi and euro, Abenomics, the oil price and leading emerging market economies including Argentina, Brazil, China and South Africa. Darrell Delamaide, Marsha Vande Berg and Steve Hanke dissect the Fed’s December interest rate rise and the prospects for more to come. Michael Stürmer and Ben Robinson place under the microscope Russia and its effects on Europe and the US. Janusz Reiter reports on the nationalist backlash in central and eastern Europe. Kingsley Moghalu, a former deputy governor of the Central Bank of Nigeria, outlines pressures facing central banks across the world, including in his own country, concluding that independence, although necessary, must never be absolute. William Keegan reviews Adair Turner’s book Between Debt and the Devil.
In terms of the dollar-renminbi fluctuations, we have, in some ways, been here before. The twin centrepieces of the Bretton Woods system, the dollar and sterling, were both under strain as a result of economic weaknesses in the 1960s and 1970s. This led to colossal upheavals in the fixed exchange rate system which, in those comparatively sheltered days, encompassed mainly the industrialised world in an arrangement protected from overly disruptive capital movements by exchange and financial controls. Curiously, the main beneficiary at the time was the German D-mark, the currency that has bequeathed the euro. A prime motivation behind the fusing of European money was the judgement by Chancellor Helmut Schmidt in the 1970s that the then West Germany was too vulnerable to take on the burden of running the world’s second most important reserve currency. His premonition proved fatally correct. The D-mark plummeted against a rampant dollar in the early 1980s – a decline that indirectly led to Schmidt’s political demise in 1982. Currency history demonstrates important lessons for China. Reserve asset status confers power, but this goes hand in hand with considerable responsibilities, and can expose countries to major setbacks. The interplay of political and monetary influence is another lesson. Ever since money was first introduced there have, from time to time, been dominant currencies. Their dominance has depended on the power of the issuer or on the reputation of the currency and its metal content. The dollar will remain the No. 1 currency for years to come, but we will see periodic assaults on its pre-eminence as other currencies wax and wane. The new-old multicurrency world beckons. It may be a bumpy ride.