The World Economic Forum’s Reserve Currency Cull

The Geneva-based World Economic Forum disseminated the results from an 18-month project on alternative future international monetary system paths which offered no clear winner among the dollar, euro, renimbi and other competing units as they position for the coming decades. The fragmentation highlighted a continued divide between global capital and trade integration and governance structures, and a mooted G-20 attempt at reform in 2011 when France was in charge of the group as the Eurozone crisis took precedence. A western view since the collapse of the Bretton Woods arrangement 40 years ago touts the adjustment benefits of floating exchange rates but many Asian markets in particular continue to prefer close management. These tensions hurt the real economy, according to banking and business executives participating in the study, resulting in disconnect between supply chains and a difficult hedging challenge for small and mid-size firms with limited sophistication. Since introduction in 2001 the euro’s share in reserves and trade settlement at almost 30 percent and 15 percent respectively advanced on the greenback with the yuan also making headway since 2009 with an incremental “internationalization” push. The three rivals now confront fundamental internal debt and growth model revamps that impinge on external financial cooperation and standing, with imbalances often reinforced in cross-regional public and private commercial and portfolio flows. A long-range scenario to 2030 incorporates a range of “multipolar” options including a split into different zones, a G-2 condominium as the Eurozone crumbles, and a heterogeneous world where advanced and developing economies jointly hold sway. The last outcome posits the RMB as the “de facto BRICs currency” with China’s own development bank and monetary fund eclipsing historical predecessors. Its trajectory checks the euro’s rise even as a full-fledged fiscal union is in place then to preserve the area. The report, which draws on meetings in New York, London and Beijing as well as the annual Davos summit, concludes that the road ahead is “rocky” in view of the inability of global institutions to handle “growing connectivity.” Within the Eurozone the countervailing forces have yet to foster effective dialogue and solutions between key stakeholders, it adds.

In Asia, the yen likewise would be outdistanced as an international unit and Korea and India are also projected as minor players even as won and rupee trading volume continues to climb in BIS surveys. The WEF interviews were completed before Prime Minister Singh assumed the finance post in an effort to combat record bottoms on a combination of confidence and balance of payments factors. The central bank reversed course on an original capital-account opening blueprint by ordering exporters to surrender half their hard currency proceeds as the raj again wielded its license.