Since the collapse of the Bretton Woods system, the world economy has been organized around the US dollar. The adverse domestic and international effects of this monetary system include global financial instability, cycles of global leveraging, destabilizing trade imbalances, and elite capture. As the provider of a national currency that is also the international reserve currency, the US faces a constant dilemma between its domestic monetary policy goals and other countries’ demand for dollars. Conversely, countries whose economies are dependent on dollars are affected by a monetary policy not of their choosing.
Bifurcated access to dollar liquidity compounds the hierarchy of the international state system and creates a two-track global economy: many Emerging Market Economies have seen local currency bond spreads spike following capital outflows and currency depreciations. In contrast, a select number of currency jurisdictions have standing access to US Federal Reserve dollar liquidity swap lines.
Ultimately, only a new international reserve currency based on a multi-polar monetary architecture will be able to ensure resilient global finance. There are many paths toward this goal. All involve a combination of creative uses of the existing international monetary system and a concerted effort toward moving toward a better international monetary system. A first concrete step would be the countercyclical expansion of the IMF’s Special Drawing Rights (SDR) as well as the promotion of SDRs for greater use in trade and commodity pricing. The European Central Bank could also extend a standing, unlimited euro liquidity swap line to the IMF to back SDR issuance. Alternatively, within the G20 process, the European Commission could explore the construction of a multi-polar synthetic currency. Furthermore, trade agreements could be coupled with standing swap facilities between respective central banks.
The most immediate challenge thrown up by the current system will relate to the management of international debts and the prevention of sudden stop scenarios. High income countries should push for legal reform in the international realm to provide better protection against creditor lawsuits and introduce better practices to support countries that find themselves in debt repayment difficulties. The G20 Debt Service Suspension Initiative could be extended to include debt relief and cover private creditors. Finally, targeted capital controls could mitigate money outflows and reduce capital market volatility.
This proposal links to Boosting Monetary Policy Capacity, in the development of a synthetic currency and curbing private leverageand Democratically Embedded Central Banking, in shifting decision making on the international financial architecture from private to public actors.