In the aftermath of the global recession, serious questions have arisen about the future of the world's financial order. The over-exposure of the US dollar was central to the rapid downturn that engulfed the economies of the world. The role of the dollar as the effectively the base currency of global trade, in concert with the never before seen level of globalisation combined to create a situation highly vulnerable to an asymmetric shock like was seen when US finance went to the wall last year. The extensive level of external debt, mainly with China and the instability of the global energy market and the endemic weaknesses of the US regulatory system as epitomised by events like the Enron collapse, set the stage for an inevitable economic catastrophe. When it did happen, the shock rippled outward through the intricate web of financial networks, touching firms and national economies across the world. When it came it came suddenly and dramatically, bringing GDP growth rates to a standstill.
But as we adapt to the fallout and struggle to plug hemorrhaging public finances and arrest free-falling employment and growth rates, attention is being given to how can this unprecedented economic crisis be avoided in future. The core issue here is how do you balance a deeply globalised world economy and the incongruous economic performances of national economies within said economic order. Considering how actions in one economy can have unforeseen consequences in another, there are inherent and credible risks around having one national currency underwriting international trade.
The US dollar as the base currency is subject to all the domestic factors of any other national currency as well as the exceptional factors that go with its role in international trade. This puts a high degree of dependence on one currency and one economy. In America's case this is a particularly acute issue with a high level of foreign indebtedness, and poor regulatory history. Thus for many today the dollars position is no longer viable. China and Russia along with several East Asian economies have been the loudest in their demands for a new approach. The solution put forth has been the creation of a new currency, based around the ill-fated ECU(European Currency Unit) that predated the Euro. This would work by creating a basket of the worlds most important currencies, weighting them and averaging out a single value that would be used as a unit of account.
If this idea is to come to fruition it will require institutional organisation. Effectively a global regulatory body to provide oversight over the currency. This new international institution will have some serious implications for global politics. First off US economic dominance comes into question. To date as the base currency the dollar underwrites US economic influence abroad.Without it what are the implications for its foreign policy or even its position as the worlds only superpower. Who will ultimately be responsible for the management of this new international regulatory body? To whom will it be accountable? What adaptations will national economies have to make? How does this effect political and economic sovereignty? How will trade relations be affected? Will this represent a move towards a global government? There are undoubtedly a myriad of issues that this new prospect raises. It can be safely assumed however that this will have considerable consequences for the international order politically, economically and strategically.
Given the seriousness of the current economic crisis something must be done to ensure our global vulnerability to such problems is addressed. Global currency or not, greater international cooperation and coordination is going to be necessary moving forward. But equally if and when this is being considered serious thought must be given to it consequences. It is not simply the case that China and Russia are concerned about economic stability, in this day and age the traditional balance of power is in flux. The US has now to treat equally with the BRIC nations(Brazil, Russia, India and China) as they begin to out pace the West economically. The adoption of the global currency means a serious reordering of the hierarchy of the global powers. It is no coincidence that it is some of these very nations calling for change. Nonetheless change is coming because as we have witnessed in the last year the cost of the status quo is no longer viable.
