Euros, Dollars and Yuans: Changes in the Global Currency Game

Andrea Muratore

Currency is not just a method of payment, general equivalent and reserve currency. It is also, if not more importantly, an instrument of power. The highest achievement of a great world power is to impose the legal tender of their own currency as a method of payment in international contexts or to create conditions that make international economic trade dependent on the flow of their currency.

The United States understood this after World War II when they managed to make the dollar the reference currency for international trade, thanks to the construction of necessary geopolitical (NATO and global military stations), institutional (IMF, World Bank and precursors to the WTO) and ideological structures (with the equivalence between democratic liberty and economic liberalism).

Currently, even four decades after the end of the dollar’s convertibility with gold and after the trauma of the Great Recession, the dollar has maintained a significant leading position. In any case, it is proving to be potentially erodible as the engine of global economic growth shifts towards the Asia-Pacific region and as challenges to the forecast of the dollar’s power emerge.

These challenges could also be of internal origin, as demonstrated by the 2016 vote that elected Donald Trump, a manifestation of an internal dilemma in the United States regarding its relationship to globalization. As Osservatorio Globalizzazione points out, in 2016 we saw the emergence of the contrast “between the two coasts – cosmopolitan centers of globalized economy, finance (dominance of the dollar) and innovation (technological dominance) and therefore two launch pads for American global power – and the agricultural and industrial central states […] For the first time, with the election of Trump, the industrial North and agricultural South united against the coasts,” making the relationship between Washington and whatever globalization remained, which was inevitably centered on the states and especially on commerce done in dollars, more linear.

In any case, these challenges are substantiated in the emergence of potential rival currencies. Currently, the currencies in the IMF breadbasket that are considered the main competitors to the dollar could be limited to the euro and yuan.

The euro and yuan are the only currencies that have, like the dollar, a global forecast and the possibility of acting as an anchor for other currencies in the rest of the world. In recent years, writes Il Sole 24 Ore, “the dollar has consolidated its role as anchor – or its «exorbitant privilege» to use the definition coined in the ‘70s by the French finance minister of the time, Valéry Giscard d’Estaing – since it characterizes 62% of the 195 countries; the Euro follows with 28% but with a decreasing value in recent years.”

The euro, as is known, does not have the supporting political, military and strategic structures that the dollar does. Although it is a currency that can cover trade in the broadest single market in the world, the euro is missing the geopolitical ability to act. When, in 2000, Saddam Hussein, interested in the euro’s entry into force, thought about using it to appraise Iraq’s oil on international markets, Brussels didn’t know how to implement the necessary actions. At the same time, in various situations of international crisis, including related sanctions applied by the United States, European countries have always followed the dollar. The cost of the euro in countries “anchored” to third-tier currencies mainly includes African countries tied to the CFA Franc/Eco, and is, therefore, an expression of French strategy and not a pan-European one.

The challenge imposed by the yuan is even more imperative, especially if China will be able to play the game of approaching the Russian ruble as Moscow looks to push for the de-dollarization of its energy trade and looks to reinforce its currency by acquiring substantial amounts of gold. “A dollar king is in full health, a euro king is tarnished, but a third aspiring king has perhaps begun its long procession,” Il Sole said, noting that in any case these motions are destined to materialize over long periods of time.

The truth of the evidence speaks of a China at peak ambition, intent on conquering shares of monetary influence in Africa, Latin America and Indo-pacific Asia, on entering energy markets and on promoting the yuan as the currency of the “New Silk Road”. But it also shows that Beijing continues to play by the rules of the globalization shaped by Washington by longing for economic and not geopolitical leadership. But China likes challenges of forecast. What’s certain is the fact that, if the age of the dollar ends, it will not be at the hands of Europe, who completely misunderstands the notion of how to create a real policy of power in the global age. A currency without a state to satisfy its appetites or without a political design guiding it is ultimately insignificant.

Translation by Alexa Ahern