Is the era of US dollar definitely over?

Questions:

1. What advantages and disadvantages would the creating of the new, global currency have? Is the US opposing the idea only because it would lose it's advantageous position in the financial world or are Washington's counterarguments based not solely on political grounds?

2. Could the creating of the global currency and replacing dollar as standard reserve currency help to find the way out of the current crisis? What would happen if for example China, Russia and the EU decide to abandon dollar as the standard reserve currency and create the new one without the US?

3. According to the Nobel prize laureate Joseph Stiglitz is the use of USD as reserve currency unfair to developing countries . What advantage does the US get with dollar as a standard reserve currency.

4. Euro was quite succesfull attempt to create multinational currency. What is the position of euro in current global monetary system. Can euro have the ambition eventually to replace dollar as the standard reserve currency?

Answers:

Menzie David Chinn, Associate Director at Department of Economics, University of Wisconsin

1,2. I think it is misleading to interpret the call for using the SDR as a call for a new currency. The SDR is an accounting device. A true currency would be backed up by a central bank, and the IMF is not a central bank. This does not mean that using a different unit of account wouldn't have a big impact. This would essentially reduce to many countries pegging to baskets of currencies rather to a given one (either US dollar, or the euro). Now, if any major country decided to peg against the euro instead of the dollar, this might or might not mean less accumulation of dollar assets. It depends how the dollar moves against the euro.

3. The role of the US dollar as the key reserve asset means that it is easier for the US government and private firms to borrow -- both in terms of access and in terms of the interest rate.

4. It is possible for the euro to overtake the dollar as the world's reserve currency. But we would need to see a drastic shock to the US economy (rapid inflation, or a collapse in the dollar's value) in order for that to occur. It's conceivable that the projected accumulation of US debt might be a trigger for a switchover, but fiscal problems in the eurozone suggest that the euro also faces challenges in becoming *the* world's reserve currency.

Christian Kellermann, International Policy Analysis Unit, Friedrich-Ebert-Stiftung

1. Creating a global currency is the optimal solution to avoid the so-called seignorage dilemma, which states that a country issuing the world's currency for reserves (and trade) is utterly creating a situation of global imbalances meaning that other countries, doing trade with the currency issuer, need to finance the issuer's external deficits. A genuine global currency issued and managed by an international body could avoid this dilemma by macroprudential adapations. The US have a monetary and political reason to stay the world currency issuer, as this special role is connected with enormous power in international relations. For example, China holding a vast sum of US Dollars has literally a lot to lose, if the US follows a devaluation, which explains the Chinese suggestion of creating a global currency. Or as John Connally, once US finance minister said in 1971: "The dollar is our currency, but your problem." This sentence is true today, but more and more countries are willing to change that simple truth.

2. No. Creating a supranational currency unit requires a couple of institutional changes, which take time and are a regulatory idea for the long run. The IMF or any other issuer of the world currency would have to take up tasks of a global central bank, which requires an enormous political will to cooperate and give up national sovereignty not at sight at the moment. To the second part of your question: this is already the case to some degree. Especially in the EU, the Euro serves as an alternative to the Dollar and this is more and more the case in other countries, which shift their reserves gradually into Euros. Furthermore, particularly in Asia, there is a strong tendency to cooperate on monetary issues and create a vast network of reciprocal swap agreements, which can be regarded as a very early stage of a monetary union.

3. The Dollar allows the US to issue external debt in their own currency and therefore force other countries to finance a standard of living beyond their means. That is in fact unfair and very dangerous for the global economy as we can see today.

4. The European capital market has the depth and size to take up the role of a global currency for trade and reserves, but this would not solve the seignorage dilemma mentioned above. Our current scenario is that Euro and Dollar will in future further compete for that role and reduce some of the negative effects connected to a single issuer status.