Towards a Multi-Currency International Monetary and Financial System

Alfonso Iozzo and Antonio Mosconi
Alfonso Iozzo is President of the Centre for Studies on Federalism and Vice President of Robert Triffin International, former Chairman of Cassa Depositi e Prestiti.
Antonio Mosconi is Former President of the Einstein Center for International Studies. Research Department, Robert Triffin International

Long before the US financial crisis of 2007-2008, which involved large and small investors in the EU, and backfired on the real economy, we thought that there was an urgent need to create a safety net for a possible dollar crisis. The safety net we identified was a basket of currencies represented by the Special Drawing Rights (SDR)...

on the International Monetary Fund, and as such not a euro-like single currency, but a common ECU-like currency.^[i]

This view was underpinned by China’s tremendous support, at the time, of the stability of the international monetary and financial system;^[ii] by Obama’s promise to include the renminbi in the SDR basket (2009), and the fulfillment of this promise – albeit only at the end of his second term (2015) due to long parliamentary opposition; and by China and the World Bank’s first bonds issued in SDR. The proposal for a “new Bretton Woods” was also consistent with this framework and remains a forward-looking goal. This proposal sought to replace the dollar, issued according to the raison d'état of a single power, with the SDR basket in preparation for a world currency independent of individual national currencies. In our experience, this is similar to the transition from single European currencies to the ECU and then to the euro. Indeed, both the ECU-euro and the SDR originated from the line of thought that began with John Maynard Keynes’s bancor, completed by Robert Triffin.^[iii] In the first amendment to the IMF’s Articles of Agreement (1969), Triffin managed to have the objective set of using only the SDR as an international currency. Despite having signed the commitment, the US prevented it from being achieved: however, the value of that long-term view has gone down on record.^[iv]

In the decade between the financial and health crises, enthusiasm for the SDR once again waned, like in the 1970s, and the creation of a multi-currency international monetary system started. Recalling Triffin’s conversion to the euro in the 1970s, when the US blocked the affirmation of the SDR, we too must recognize that another phase should be completed before we get to a world currency. On the other hand, Bretton Woods was only actually possible because the US’s overwhelming military and financial superiority at the end of the Second World War allowed it to impose the dollar, and not the bancor, as the world currency. This was a confirmation of reality. The next Bretton Woods must mark the end of hegemonies, and the beginning of cooperation. Therefore, it will involve far more complexity than an imposition. Parties to it will not be individual nation states, but large currency areas, and we need to focus our attention on creating them. A short-term view needs to be taken, while not getting distracted from the long-term one, remaining well aware of how the multi-currency system, that emerged between the two wars, ended. This new multi-currency system certainly will not be stable either; we federalists will have to fight for solutions that can preserve our greatest value: peace. Therefore, once again, it is a question of reasoning in terms of realpolitik to make the transitionary arrangements’ inadequacy clear with respect to the new scientific and technological “mode of production”, which has made it possible the globalization of productive forces. We should observe what is happening to the dollar, the euro, the renminbi, the yen and other currency areas made up of countries that are interdependent but without plans for a monetary union. We will not mention the pound sterling, whose weight is now insignificant as the UK completes its post-imperial suicide with Brexit. Fortunately, the victory of democratic political forces over nationalist ones, both at the 2019 European Parliament elections and the 2020 US presidential elections, makes it possible to resume trans-Atlantic talks about the revival of multilateralism and international organizations. However, it will take time to remedy the damage caused by the Trump presidency. Biden himself aims to create a summit of democracies, thus excluding many peoples from participating in world decision-making, and giving the US the ability to decide which countries are democratic and which are not.

The dollar is burdened by a mountain of debt that is unprecedented in human history. The “paper pyramid” (Guido Carli), in comparison, seems modest today, while “deficits without tears” (Rueff-De Gaulle) and the “exorbitant privilege” (Giscard d'Estaing) remain in place. One may wonder why the dollar is still accepted as a reserve and financing currency, ranking first among currencies, despite Russia and China’s massive sale of dollars in favor of gold and the euro. At the same time, one has to consider why the euro is about to overtake the dollar as an international means of payment. The financial supremacy of the dollar contrasts with that of the euro in the real economy. The weakness of the euro in the financial sector reflects the two areas of integration that have yet to be completed: the banking union (there is still no agreement on a common deposit insurance) and the European capital market. Moreover, there is always the question of path dependence: the US banking system was developed in a large unified market to match imperial ambitions, while the European banking system has suffered for a good part of its life because of the continent’s division into nation-states that were at war with each other. The dollar retains this strength, a legacy of history, because after the declaration of the dollar’s inconvertibility to gold (Nixon, 1971), and during the first oil crisis (OPEC, 1973), the US managed to ensure that the world oil price be quoted in dollars, bending the will of producing countries, which wanted the quoted prices to be in SDR. Energy was quoted in dollars because the US provided military protection along the supply routes and made it possible to recycle the vast amounts of dollars that were accumulating in oil-producing countries by investing in the US itself.

Thus, the myth of the world “policeman and banker” arose. The policeman has been discredited by uninterrupted series of wars lost or “not won”, while the serious financial crises of Southeast Asia, Russia, large American companies and finally Wall Street itself have shown the rest of the world that de-dollarization and the accumulation of diversified reserves are a strategic priority. From the outset, it was evident that the formula “oil-for-dollar investments” would result in a cumulative US current account deficit offset by capital movements (which are nothing but external debt). The US authorities responded to this objection with “The debt is ours, but the problem is yours.” Europe united and created the euro. In addition, the previous US Administration has weakened the role of the dollar as convertible currency, let alone the one as world currency, because large countries are subject to US diktats (sanctions) extended to the rest of the world with the threat of being excluded from the US financial market, the payment system (SWIFT), etc. The case of Iran best illustrates the situation that has arisen.^[v]

The European Commission’s stated intention to foster the international use of the euro, seems to run counter to our conviction that the “Triffin dilemma”^[vi] applies not only to the dollar, but also to the euro and any other regional currency which has been given a global role. In reality, the Union does not aspire to a global role for the euro but intends to address situations that fall within its sphere of regional responsibility (its “backyard”) and risk running out of control. Let’s think first of the East. The situation in Ukraine has yet to be resolved, and will not be unless there is overall peace between the European Union and the Russian Federation. This result can be achieved on the basis of the economic interdependence between the two groups of countries,^[vii] but may also be hindered by the US, which will therefore have to get back into the game. In the meantime, during the financial crisis caused by the coronavirus, the Fed has enabled the usual swap agreements for all countries short of dollars except China and Russia, in the latter case the Fed being promptly replaced by the ECB. For us Europeans, achieving peace with Russia is absolutely essential. The EU has two foreign policy instruments: membership and association. The latter formula, which has been developed in various forms (as in the case of Norway, Switzerland and even Brexit) can also be adapted to the Russian Federation. Hitherto neglected institutions such as the Council of Europe and the OSCE will be able to provide the political framework for the “Common Home” to which Gorbachev aspired.^[viii]

The other part of the “backyard”, i.e. our regional responsibilities, are Africa, for which the EU has launched the “Development Plan for Africa”, and the Middle East. These two areas must be addressed together, not only because of the common problems of fostering peace between Shiite and Sunni Muslims, and the control of terrorist fundamentalism, but also because here, more than elsewhere, the currency choice is of decisive global political importance. In this case the free trade areas currently being created^[ix] will choose the currency in which the price of oil and many raw materials will be fixed. In practice, this means replacing the dollar. In our opinion, the SDR (e.g. the Afro-SDR, etc.) and not the euro should be proposed, initially as a unit of account, and then following the same path that led from the European Payments Union to the European Economic and Monetary Union. Why not the euro? For the same reason that the dollar or the renminbi cannot be used: A common currency must be used that neither evokes past colonialism nor threatens forms of future domination. To this end, it is crucial that the European Union has the African Union as its main interlocutor and partner. Finally, also with regard to the US, the adoption of a basket where the dollar still weighs more than 40%, even if it is to be gradually reduced according to IMF rules, will make the transition less painful.

As mentioned, China has chosen the path of internationalizing the renminbi with respect to its definition in terms of SDR. However, a new major event has changed the scene: the creation of a large free trade area that includes China, Japan, South Korea, Australia, New Zealand and ASEAN countries,^[x] from which the US has excluded itself due to Donald Trump’s isolationism. When the time is ripe to choose a common currency for this gigantic Asian market, it is unthinkable that the countries that escaped the supremacy of the dollar would want to be subject to the supremacy of the renminbi (and, least of all, the yen, whose population is a tenth of the Chinese one). At that point, one option will be to peg currencies to the SDR. And this is the one to fight for.

Let’s also take a long-term look at Latin America. The various attempts at regional unity have always resulted in conflicts between right and left “democratures”. From a monetary point of view, pegging the various currencies to the SDR would bring a strong element of peace, but this alone is not enough. A basis for understanding must be established. So far only Pope Francis has understood what is at stake (peace) and, despite his age, he went to Congo and will go to Iraq and China. However, how can we ask the Pope to go to the opposite democratures of Venezuela and Brazil as well?

Finally, a look at the future international monetary system must include digital currencies, alongside the dollar, the euro and the SDR. The question is whether these can exist independently. Our answer is no. The experience of bitcoin, characterized by enormous fluctuations in value, has ruled out it performing the functions of a currency (unit of account, medium of exchange and store of value). The big names in Silicon Valley have noted this deficiency and have felt the need to peg their lybra to a basket of currencies, obviously different from the SDR. This project is also struggling to take a final shape. From the point of view of power, these projects echo the ideas of the Mont Pelerin Society, established by von Hayek: The value of everything must be established by the market, and even currencies must compete with each other, without a public monopoly. Fortunately, not even the great neo-liberal and neo-con wave, which began with Reagan and continued until Trump’s failed coup, was able to succeed on this point. While citizens may be gullible about grand political “visions”, when it comes to their savings they understand that they need rules and guarantees: Central banks with their reserves and their powers of control are better. However, an international monetary system with digital currencies replicating the real ones will not ensure greater efficiency, unless there is a single digital currency pegged to the SDR, because what the world needs is a world currency.

^[i] Alfonso Iozzo and Antonio Mosconi, The Foundation of a Cooperative Global Financial System. A New Bretton Woods to confront the crisis of the international role of the US dollar, in The Federalist Debate, 2/2006.

^[ii] Xiao-Chuang Zhou, Reform the International Monetary System, in BIS Review, 41/2009.

^[iii] Tommaso Padoa-Schioppa, The Ghost of Bancor: the Economic Crisis and Global Monetary Disorder, lecture at the University of Louvain-la-Neuve, 25 February 2010, included in the collection of his essays The Ghost of Bancor, 2016.

^[iv] Elena Flor, SDR: from Bretton Woods to a World Currency, Peter Lang, 2019.

^[v] Miriam L. Campanella, Far-Reaching Consequences of US Financial Sanctions. The Dollar Shortage and the “Triffin Moment”, RTI June 2019.

^[vi] In 1960 Robert Triffin, during a hearing in front of the US Congress, stated that an international monetary system based on a currency issued from a single state – such as the dollar – could not function in the medium-long term. In order to ensure the necessary liquidity to the world economic system, the issuing country needed to have a deficit in the payment balance but if the deficit was too much the trust in the currency would erode: the "dilemma". In the Bretton Woods system, the dollar was convertible into gold at the price of $ 35 an ounce. Triffin had predicted that it would be impossible to keep the promise and that the dollar was therefore not convertible, as President Nixon then announced in his famous statement of August 15th, 1971.

^[vii] Elena Flor, Russia in the Triffin Dilemma, from De-Dollarization to new Commercial Perspectives, RTI Paper N.14, December 2020.

^[viii] J.P. Baratta, D. Moro and G. Montani, A New Atlantic Pact. A Peaceful Cooperation Area from Vancouver to Vladivostok, The Ventotene Lighthouse, 7 October 2020.

^[ix] Elena Flor, “Monetary Aspects of the African Continental Free Trade Area”, in Alberto Majocchi (ed.), Africa and Europe a Shared Future, Peter Lang, 2020.

^[x] Indonesia, Brunei, Cambodia, the Philippines, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam.