AbstractThe recent "liberal international order" (LIO) debate has been vague about the institutions and issue areas that constitute the order. This is likely driven by competing views of "liberal" and, perhaps more importantly, by security scholars dominating the debate. From the perspective of scholars who explore the elements of the global monetary order (reserve currencies, international financial institutions, and central banks), the picture is different. Where security scholars point to a decline in US influence, scholars of global monetary politics see continued US dominance. Moreover, monetary prominence has been a precondition for the viability of great power projects of order building more generally. This symposium offers such a counter narrative. While the security challenges are real, the crises of the last decade have actually reinforced the centrality of the US dollar and American financial power in the international system.
For many observers, internationalization is the yuan's manifest destiny - an irresistible by-product of the remarkable economic success of the People's Republic of China (PRC). But is such confidence warranted? Recent history has seen the emergence of other currencies that were also expected, at least for a while, to attain wide, growing cross-border use. These included the deutsche mark (DM), the Japanese yen, and the euro (successor to the DM). Yet in the end their internationalization reached an upper limit, short of expectations. Will history repeat itself? Or will the yuan prove exceptional, the currency that finally managed to keep ascending where others faltered? The aim of this paper is to see what lessons may be drawn from these earlier experiences for the anticipated internationalization of the yuan. Much can be learned from their stories - first, about what may drive the internationalization of a currency, and second, about what may ultimately set a limit to the process. The main message of the analysis is that the challenge of internationalization is formidable, involving demanding conditions. Can Beijing sustain its record of price stability and effective policy management? Can the country succeed in shifting its industrial and trade structure toward exports of more advanced differentiated products? Can the yuan's convertibility be broadened? Can domestic financial markets be adequately developed? Can the country's political institutions be trusted? Can geopolitical tensions be avoided? Contrary to predictions of the yuan's "inevitable" rise, success in all these respects is by no means guaranteed.
One of the most striking financial developments in recent years was the emergence of sovereign wealth funds (SWFs) – large publicly owned investment portfolios, which until recently were growing rapidly in both number and size. In a global environment already roiled by a prolonged credit crisis, SWFs raise tricky and potentially controversial new questions for international financial regulation. One issue of concern to many in host countries is the possibility that some SWFs might be used for overt or tacit political purposes, posing a challenge for global monetary governance: a Great Tradeoff between, on the one hand, the world community's collective interest in sustaining the openness of capital markets; and on the other hand, the legitimate national security concerns of individual host countries. Can some balance between the two be found that will be both stable and acceptable to all concerned? Individually as well as collectively, recipient countries have begun to address the regulatory challenge directly. To date, however, accomplishments have been slight and have failed to stem a noticeable drift toward financial protectionism. A review of some recent proposals suggests that there is no foolproof solution to the Great Tradeoff. But the potential for controversy could be significantly reduced by a negotiated agreement among host governments addressing three key issues: (1) definitions; (2) risk assessment; and (3) dispute resolution. The most logical venue for such an exercise would be the OECD, building on its already extensive experience with international investment issues.
After nearly a century of dominance of the international monetary system, has the US dollar finally met its match in the euro? When Europe's Economic and Monetary Union (EMU) came into existence in 1999, many observers predicted that the euro would soon join America's greenback at the peak of global finance. Achievements, however, have fallen short of aspirations. After an initial spurt of enthusiasm, international use of the euro now actually appears to be levelling off, even stalling, and so far seems confined largely to a limited range of market sectors and regions. The euro has successfully attained a place second only to the greenback, but it remains, and is likely to remain, a quite distant second without a determined effort by EMU authorities to promote their money's global role. The temptation will surely be great. In practical terms, it is difficult to imagine that EMU authorities will refrain entirely from trying to promote a greater role for the euro. But that, in turn, could be a recipe for discord with the US, which has never made any secret of its commitment to preserving the greenback's world-wide dominance. A struggle for monetary leadership could become a source of sustained tensions in US-European relations. Fortunately, however, there seems relatively little risk of a destabilising escalation into outright geopolitical conflict.
This essay looks at the dynamics of power and rule setting in the international monetary system. I begin with a brief discussion of the meaning of power in international monetary relations, distinguishing between two critical dimensions of monetary power, autonomy and influence. Major developments have led to a greater diffusion of power in monetary affairs, both among states and between states and societal actors. But the diffusion of power has been mainly in the dimension of autonomy, rather than influence, meaning that leadership in the system has been dispersed rather than relocated – a pattern of change in the geopolitics of finance that might be called leaderless diffusion. The pattern of leaderless diffusion, in turn, is generating greater ambiguity in prevailing governance structures. Rule setting in monetary relations increasingly relies not on negotiations among a few powerful states but, rather, on the evolution of custom and usage among growing numbers of autonomous agents. Impacts on governance structures can be seen at two levels: the individual state and the global system. At the state level, the dispersion of power compels governments to rethink their commitment to national monetary sovereignty. At the systemic level, it compounds the difficulties of bargaining on monetary issues. More and more, formal rules are being superceded by informal norms that emerge, like common law, not from legislation or statutes but from everyday conduct and social convention.
The purpose of this chapter is to evaluate the experience of the Euro Area to date in a broad global context. The central question is: How has the creation of the euro affected the power of participating states to cope with external challenges? Three broad issues are explored. First, how well equipped is the Euro Area to deal with any threat of financial instability? Second, can the euro compete effectively with America's dollar in global markets? And third, does membership in the Euro Area enable European Union governments to play a more influential role in international financial forums? Overall, the chapter concludes, the project has failed to live up to expectations. Though exposure to exchange-rate disturbances has been reduced by the merger of currencies, the Euro Area remains largely a passive participant in global payments developments and, if anything, has become even more vulnerable to threats of financial instability. Likewise, the euro has failed to mount a significant challenge to the dollar and the bloc continues to punch below its weight in monetary diplomacy.
How will the euro affect transatlantic relations? Even while partners in a political and military alliance, Europe and the United States have long been rivals in monetary affairs. Until recently, however, it was a rather one-sided contest, since Europe had no currency – not even the fabled Deutsche mark (DM) - that could effectively match the U.S. dollar as international money. Now Europe has the euro, which many have predicted will quickly emerge as a potent competitor to America's greenback. Could growing rivalry between the dollar and the euro endanger the historic European-American partnership?
Few issues of public policy roil Canadians more than the idea of a North American Monetary Union (NAMU), establishing one currency for Canada and the United States. As other contributions to this special issue testify, opinions among Canadians differ sharply and divisions run deep. From the maritimes to the Pacific, Canadians are far from consensus regarding the future of their national money, the much belittled "loonie." But what about opinion south of the longest unguarded border in the world? Largely lost in the din of debate among Canadians is the perspective of the United States, Canada's putative partner. America's interest in NAMU is rarely addressed in any systematic manner. This is surely a critical omission. Even if Canadians could unite in favor of currency union as a policy goal, a vital imperative would remain – namely, the need to gain support from Washington. How would Americans view a monetary initiative from Ottawa? Would the prospect of NAMU be greeted with open arms or with hostility? As a practical matter, a common currency would be impossible without the concurrence, or at least the compliance, of the United States. This essay explores the NAMU issue specifically from a U.S. point of view, addressing both economic and political aspects. The big question is: What does the United States have to gain? The short answer, which will disappoint many Canadians, is: Not much. The U.S. greenback, as the world's leading international currency, already generates considerable benefits for Americans. That is the starting point from which analysis must proceed. As compared with the status quo of America's de facto market dominance, a formal monetary union with Canada, though not without advantages, would threaten more risks and losses for the United States than gains. Moreover, this negative assessment holds true no matter what form NAMU might take – whether modeled on Europe's euro, substituting an entirely new North American money for the continent's two existing dollars; or if instead it were simply to replace the Canada's loonie with the greenback, a "dollarization" model. Either way, under present circumstances, the idea can be expected to elicit little interest among Americans and even less encouragement.
What is America's interest in dollarization? Formal adoption of the dollar by other governments creates both opportunities and risks for the United States, political as well as economic. But few benefits or costs can be estimated in advance, leaving much room for debate and disagreement. The argument of this paper is that no presumption can be established either way, whether for or against dollarization, from a strictly U.S. point of view. Unless directly challenged by efforts elsewhere to establish formal currency blocs, the United States has no interest in promoting a wider role for the greenback.
What is America's interest in dollarization? Formal adoption of the dollar by other governments creates both opportunities and risks for the United States, political as well as economic. But few benefits or costs can be estimated in advance, leaving much room for debate and disagreement. The argument of this paper is that no presumption can be established either way, whether for or against dollarization, from a strictly U.S. point of view. Unless directly challenged by efforts elsewhere to establish formal currency blocs, the United States has no interest in promoting a wider role for the greenback.
Geopolitics, the dictionary tells us, is about international great-power rivalries – the struggle for dominance among territorially defined states. Conflict is at the heart of geopolitics. Geopolitical relations are dynamic, strategic, and hierarchical. In geopolitics, the meek definitely do not inherit the earth. Today, much the same can be said about currencies, which in recent years have become increasingly competitive on a global scale. Monetary relations, too, have become conflictual and hierarchical; and the meek are similarly disadvantaged. At issue is a breakdown of the neat territorial monopolies that national governments have historically claimed in the management of money, a market-driven process that elsewhere I have described as the deterritorialization of money (Cohen 1998, 2003a). In lieu of monopoly, what we have now is more like oligopoly – a finite number of autonomous suppliers, national governments, all vying ceaselessly to shape and manage demand for their respective currencies. Since state are no longer able to exercise supreme control over the circulation and use of money within their own frontiers, they must instead do what they can to preserve or promote market share. As a result, the population of the monetary universe is becoming ever more stratified, assuming the appearance of a vast Currency Pyramid -- narrow at the top, where the strongest monies dominate; and increasingly broad below, reflecting varying degrees of competitive inferiority.
The aim of this essay is to provide the first building blocks for a positive theory of currency regionalization. In the spirit of the actor-oriented framework outlined by Kahler and Lake (Chapter 1), the analytical focus here is the state–specifically, central decisionmakers responsible for currency policy. The working assumption is that economic globalization is driving policymakers to reconsider their historical preference for strictly national money. The question is: What delegation of authority is most likely to emerge in individual countries? What conditions are most likely to influence the choice among available options? The essay is organized as follows. I begin in the first section with a brief look back at the dramatic transformation of global monetary relations that has occurred in recent decades–a period during which many governments, finding it increasingly difficult to sustain the market position of uncompetitive national currencies, have begun to reflect instead on the possibility of a regional currency of some kind. Section II then highlights the considerable leeway available in designing alternative forms of either currency unification or dollarization, while Section III identifies key factors that can be expected to dominate the calculations of rational policymakers in thinking about the choices before them. Taking all factors into account, it is clear that for many states traditional sovereignty will remain the preferred option. But taking account of possible variations in the degree of regionalization, it is also clear that for many other countries some form of monetary alliance or subordination could turn out to be rather more appealing.
Geopolitics, the dictionary tells us, is about international great-power rivalries –the struggle for dominance among territorially defined states. Conflict is at the heart of geopolitics. Geopolitical relations are dynamic, strategic, and hierarchical. In geopolitics, the meek definitely do not inherit the earth. Today, much the same can be said about currencies, which in recent years have become increasingly competitive on a global scale. Monetary relations, too, have become conflictual and hierarchical; and the meek are similarly disadvantaged. At issue is a breakdown of the neat territorial monopolies that national governments have historically claimed in the management of money, a market-driven process that elsewhere I have described as the deterritorialization of money. What are the geopolitical implications of this new geography of money? At present, one currency stands head and shoulders above the rest –the US dollar, familiarly known as the greenback. The dollar is the only truly global currency, used for all the familiar purposes of money –medium of exchange, unit of account, store of value– in virtually every corner of the world. From its dominant market share, the United States gains significant economic and political advantages. The question is: can the dominance of the dollar be challenged? The answer comes in two parts: first, if we look at the logic of market competition; and, secondly, if we factor in government preferences as well.
Is dollarization in the U.S. interest? As more Latin American countries contemplate following the examples of Ecuador and El Salvador, which have dollarized unilaterally, it is natural to ask whether the United States can expect to gain or lose in the process. In my opinion, the answer is clear. Considering political as well as economic implications, there is little doubt that risks and prospective costs far outweigh possible benefits. Unless directly challenged by efforts elsewhere to promote international currency use at the dollar's expense, the United States has no interest in encouraging formal adoption of the greenback by neighboring governments. The reason is straightforward. Much of Latin America is already extensively dollarized on a de facto basis, as a result of currency substitution – a spontaneous, market-driven process now customarily distinguished as informal or unofficial dollarization. Informal dollarization, it may be argued, realizes significant advantages for the United States. As compared with these gains, little would be added by formal (official) dollarization and much, conceivably, could be lost.
Accelerating cross-border competition among currencies is creating increasing turbulence in the international monetary environment. Are national currencies becoming obsolete? Currency competition compels governments to choose from among a limited number of strategies, only one of which involves preservation of a traditional territorial money. Many national currencies will disappear, leading to an increasing number of regional currencies of one kind or another – a distinctly new geography of money. But there is no sure way to predict what that new geography of money will ultimately look like. We have a fairly good idea of the principal factors that are likely to influence state preferences, but many configurations are possible and even probable.