January 31, 2012
One question that arises is whether the political leadership has sufficient time. If it is a multi-year project as you suggest, what about the contagion that we’re facing in Greece, Portugal and Ireland? The consensus is that those economies are small enough in scale relative to Europe as a whole that they can be contained. But if Spain and Italy run into substantial problems, and their borrowing rates escalate, will that be more problematic?
As we speak here today, Italy has run into those problems. Italy is paying over 7% on its 10-year bonds. It is an economy whose nominal growth rate, real growth plus inflation, is on the order of 2% at best. That is not a sustainable situation. Italy only has to renew or roll over about a fifth of its debt this year, so the hit to its budget is containable, but what it means is that the Europeans have a window of a year or so to solve those problems, to restore confidence in the European economy, in the Italian economy and its finances, and critically, to begin to grow again.
So, to my mind, there are two big problems in Europe. One has been solved – the banking problem – because the European Central bank has committed to provide liquidity for as long as three years to the banks. Number two is the growth problem, and that one hasn't been solved. Italy and Spain and the others need to grow in order to pay their debts and maintain political support for economic reform. That growth is not on the horizon yet. The forecasters tell us that Europe should have a mild and short recession in 2012, but unfortunately the forecasters are not always right.
Last year you published a book, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. You are delivering a talk on moving to a multiple-reserve-currency system. What is happening to the role of the US dollar as the reserve currency?
One of the points I wanted to make in the book is that we still live in a remarkably dollar-centric world. The dollar is still used in 85% of all foreign-exchange transactions worldwide. It still accounts for nearly two-thirds of all of the foreign-currency reserves of central banks and governments around the world.
People talk about how the euro one day may rival the dollar, assuming it survives. They talk about how China’s currency may one day rival the dollar.
They are right, but that is a discussion about the future.
For the time being, financial markets revolve around the dollar. Even when there are shocks to those markets that are created by the United States, like the debate over the debt ceiling last summer and the downgrade of US Treasury debt by Standard & Poor's, investors rush into dollars as a safe haven rather than rushing out.
So that is the "rise" in the title of your book. Let's talk about the "fall." What do you anticipate?
The dollar became the dominant global currency in the second half of the 20th century for good reasons. The United States was far and away the dominant creating-and-producing nation. Only the United States had deep and liquid financial markets open to the rest of the world, but that is no longer true now. The US accounts for something on the order of 20% of the global economy, and increasingly there are other advanced and emerging markets that have opened their financial sectors to foreign investors. We can expect that to continue. Other parts of the world will be growing faster than the United States, which is a mature economy.
Ten years from now, China's currency, the renminbi, will be an attractive vehicle for settling import and export trade, in Asia especially, and for doing a variety of international financial transactions. If you look out another ten years, people will be thinking about using Brazil's currency or India’s currency.
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