The attention of opinion and of parliaments is largely directed to the political and humanitarian issues of an armed confrontation which is taking on the atrocious aspect of a civil war in Europe as happened in Spain in 1936 and as happened in Yugoslavia in 1991.
However, the current war also has some consequences on all aspects of relationships international, including economic and monetary ones. It is not for nothing that the greatest book on the First World War was written by an economist and bears the prophetic title The economic consequences of war. And Keynes' ominous predictions all came true, one after the other, to such an extent that some historians tend to consider the two world wars of the twentieth century to be in perfect continuity, so as to assume that there was only one.
An economist of Keynesian training, Martin Wolf, whose place in the field in the current conflict is absolutely not in question as it was not that of Keynes, is systematically intervening in the newspaper, the Financial Times, of which he is chief economist commentator. He often returns to the heavy economic and financial consequences of this unfortunate war and on the world that will come out of the current mess.
One of the last interventions, of which we report the Italian version below, is dedicated to monetary and currency issues in international trade after the financial sanctions against Russia have opened up a new global framework that opens up many and perhaps unthinkable scenarios.
Let's follow Wolf's reasoning.
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Big measures, big consequences
At the end of January, Russia had $469 billion worth of foreign exchange reserves. This nice nest egg had been amassed after learning the lessons of the 1998 default and also in the hope of Vladimir Putin to guarantee thefinancial independence of your country.
But, when his "special military operation" in Ukraine began, Putin learned badly that more than half of its reserves had been frozen. The currencies of his enemies had ceased to be usable money for him. This situation is not only significant for Russia. A targeted demonetization of the world's most globalized currencies has major implications.
Money is a public good
Global money – which people rely on in their cross-border transactions and investment decisions – is a global public good. But the providers of that public good are national governments.
This was the case under the old gold-based exchange standard as well. In our era of fiat currency (made by governments since 1971), 65 percent of the world's foreign exchange reserves were denominated in dollars, another 23 percent in euros, 5 percent in yen, and 4,7 percent in yen. hundred in pounds. The Chinese renminbi still made up less than 3 percent of global reserves. Today, global money is issued by the United States and its allies, even small ones.
The "weaponization” of currencies
This state of affairs is not the result of a conspiracy. The trading currencies are those of open economies with liquid financial markets, monetary stability and the rule of law. Nevertheless the “weaponization” of these currencies and the financial systems that manage them call this status into question and every holder of currency, faced with that use, fears being targeted.
Sanctions on Russia's central bank come as a shock. Who, governments wonder, will be next? What does this mean for our sovereignty?
Criticisms can be made to Western actions on strictly economic grounds: the weaponization of currencies will fragment the world economy and make it less efficient.
One could reply in many ways to these criticisms, it is true, but this discussion becomes increasingly irrelevant in a world of strong international tensions. Well, here's another powerful force that pushes deglobalization, and many ask themselves “now what?”.
A more troubling objection for Western politicians is that the use of these types of weapons could harm them. The rest of the world will not rush to find new ways of transaction and storage of value that bypass the currencies and financial markets of the United States and its allies? Isn't that what China is trying to do right now?
The four possible substitutes for today's globalized national currencies
That's it. In principle, one could imagine four substitutes for national currencies globalized today:
1) private currencies (such as bitcoin);
2) basic currency (such as gold);
3) a global fiat currency (such as IMF Special Drawing Rights);
4) another national currency, obviously the Chinese one.
The first is inconceivable: the market value of all cryptocurrencies it is currently $2 trillion, a sizeable figure, but a mere 16% of the world's foreign exchange reserves. Furthermore, transacting directly in cryptocurrencies is impossibly complicated. Gold may be a reserve asset, but in transactions it is hopeless. There is not even the possibility of agreeing on a global assessment of it even to replace reserves, let alone be a vehicle for international transactions.
This leaves room for the hypothesis of another national currency as a substitute. An excellent recent booklet by Graham Allison and colleagues at Harvard, The Great Economic Rivalry, concludes that China is already a formidable competitor to the United States. History suggests that the currency of an economy of its size, sophistication and integration could become a global currency.
Weak alternatives to the dollar/euro
So far, however, this has not happened, because China's financial system is relatively underdeveloped, its currency is not fully convertible and the country is not a true rule of law.
China is a long way from what the pound and the dollar were in their heyday. On the other hand, holders of the dollar and other major Western currencies that could be subject to sanctions must be fully aware of what the Chinese government could do to them if they displease it.
Equally important: the Chinese state knows that an internationalized currency requires open financial markets, but introducing this state of affairs would radically weaken its control over the Chinese economy and society.
The lack of a truly credible alternative suggests that the dollar will remain the world's dominant currency.
The China option
Yet there is an argument that goes against this complacent view. It is found exposed in Digital Currencies, an interesting pamphlet from the Hoover Institution.
The pamphlet argues that China's cross-border interbank payment system (Cips, an alternative to the Swift system) and digital currency (e-CNY) could become a payment system dominant and a vehicle currency for trade between China and its many trading partners.
Long-term, e-CNY could also become a reserve currency significant. Furthermore, the brochure argues, this would give the Chinese state detailed knowledge of each entity's transactions within its system. This would constitute an additional resource of power.
Future developments: two monetary systems
Today, the overwhelming dominance of the United States and its allies in global finance, a product of their aggregate economic size and open financial markets, gives their currencies a dominant position.
Today, there is no credible alternative for most global monetary functions. High inflation is probably a bigger threat to confidence in the dollar than using the currency against rogue states.
In the long run, however, China may be able to create its own perimeter for the use of its currency by the states that are closest to it. Even so, those wishing to transact with Western countries will still need Western currencies. What might emerge are two monetary systems – one Western and one Chinese – operating in different ways and overlapping in an uncoordinated way.
As in other aspects, the future promises less a new global order built around China than disorder. Future historians may see today's sanctions as another step on the journey to chaos.
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Martin Wolf, A new world of currency disorder looms, The Financial Times, March 29, 202
