September 04, 2018
Is the dollar losing its international role?
We are happy to have made our own modest contribution to trigger a wider debate on the international role of the euro, for which we noted two interesting entries. The first is by Jeffrey Sachs who argues that the US dollar has been gradually losing its preeminent global role as a result of a series of policy blunders: President Nixon’s decision to renounce the right of foreign central banks to convert their gold holdings into dollars in 1971, followed by the handling of the Asian crisis in 1997. The two events led respectively to the creation of the euro in Europe, and China’s strategy to internationalise the renminbi. Donald Trump’s trade war against China and his "America First" policy now mark the third stage in the dollar’s global decline. It will strengthen China’s determination to become less reliant on the US for finance and trade, and will ultimately lead to a renminbi-based global payments system as an alternative to the dollar system.
Mark Schieritz picks up on the impact of US sanctions against Iran in a column in Die Zeit. He notes that one way of circumventing the secondary sanctions against German companies is to use the Bundesbank. In compliance with the US sanctions, the Bundesbank recently made it harder for Iran to reclaim €300bn which the country has in various accounts in Germany. The German government could pass a law to force the Bundesbank to keep up the payment stream. In that case, the Bundesbank would no longer comply with US sanctions, and could technically itself become subject to secondary sanctions. But would the US go that far? The Bundesbank is a state-owned institution of a large EU country. Subjecting the Bundesbank to sanctions would be the equivalent to declaring economic war. In that case, the EU could hit back and confiscate the properties of the Trump family in Europe, Schiertz proposes.
His broader point is that the US are masters in getting others to comply with their policy, but the EU also has tools available for its defence. The experience with Trump so far has shown that he is ready to compromise if confronted with pressure.
What intrudes into both arguments above is the natural tendency by China and the EU to prioritise the competitiveness over the international role of their respective currencies. Both China and the eurozone run large and persistent current account surpluses. The savings surplus makes them buyers of third-country - i.e. US - assets, which is what sustains the dollar’s international dominance. For as long as the business model of the EU and China consists of gaining manufacturing competitiveness, it will be hard for the respective authorities to use the financial system as a prime-grade tool in foreign policy.
Sachs is right about the impact of the Bretton Woods breakdown on the debate in Europe. This has given the euro the current minor-celebrity role it enjoys as an international currency. But with policy as it is, the international role of the euro remains a residual.