Reform of the International Monetary System – When Will There Be a Real Alternative to the USD?

The emerging countries are waiting more than ever for the emergence of a sufficiently credible competitor to the American dollar.

This is an idea that has been around for several years and is now resurfacing, thanks to the war in Ukraine and Sino-American tensions. With the rise in power of emerging countries and Southeast Asia, it is time to reform the international monetary and financial system, which relies almost exclusively on the US dollar. It is the only global store of value as the United States loses economic ground to other giants like China.

At a conference held in mid-May 2022 at the Banque de France and attended by several dozen leaders of emerging countries, from India to the Philippines, Governor François Villeroy de Galhau defended “the idea of a cooperative multilateral international financial system” to put an end to “excessive dependence on a single central currency”, the dollar. “The status quo is no longer an option,” he said.

Future Dangers

Why revive this debate today? Because there are “dangers ahead. We must avoid moving from a system dominated by the dollar to a non-conflictual system. Why revive it with, for example, a dollar world opposed to a renminbi world”, according to the head of the Banque de France. “Such fragmentation would generate instability, creating the risk of leakage from one currency to another,” he continued. This would be reminiscent of the competitive currency devaluations between the two world wars when the dollar and the pound sterling were fighting for leadership. This bipolar system resulted in chronic instability.

“We are on the verge of a major financial crisis,” says Bernard Snoy, a professor at the University of Louvain in Belgium, who fears that the next interest rate hikes in the United States could lead to a flow of capital. These could lead to capital flows from emerging countries to America and destabilize countries indebted in dollars.

The emerging countries are not against such a reform. Especially since Western sanctions against Russia “create a very dangerous risk” for countries like China, argued Andrew Sheng, former head of Hong Kong's financial markets regulator. The Chinese, in particular, could start selling their dollars to protect themselves against future sanctions. But so far, they have no choice.

When will a credible alternative to the American dollar emerge?

The dollar remains the currency in which the world's savings are invested. This role is perverse because it forces the United States to constantly issue debt securities denominated in greenbacks that investors continue to buy. As a result, the country is drowning in an abysmal current account deficit.

But where to find other reserve currencies?

The euro could theoretically be an alternative. This is in any case the wish of François Villeroy de Galhau, for whom “we absolutely must develop the international role of the euro”. Harinder Kohli, a former World Bank official and now president of the Emerging Markets Forum, who organized the conference, supports the initiative, as does Andrew Sheng:

“The euro and yen must become international currencies. You have to do it. Otherwise, the next crisis will be painful for emerging countries and will prompt them to create their own monetary and financial systems.”

But the Eurozone still lacks safe public debt securities and a truly European Treasury. Today, public debt remains that of the member states. The other problem is that the Sino-American rivalry and the war in Ukraine are not going to improve cooperation at the global level.

On the contrary...

This war in Ukraine could be about to create a de facto Bretton Woods III which will be backed by outside money, like gold, commodities, or why not gold. All this would be at the expense of the US dollar, and in favor of China. But only time will tell whether this hypothesis is valid or not.