The US dollar has been losing its lustre as a medium of global transactions and reserve currency for the last so many years due mainly to a very wide gap in the trade balance of the United States, its weakening currency in the international market and a much higher level of holdings of the US dollars by foreigners.
It is thus natural that calls for reform of the international monetary order are becoming louder as the US currency is pounded and getting increasingly debased. Showing a degree of impatience on 7th January, 2010 when the Euro edged down to about 1.44 dollars, French President Nicolas Sarkozy called for an end to the dollar's predominance, warning that its weakness poses an unacceptable threat to European competitiveness. Upping the ante, he said that "the monetary disorder has become unacceptable.
The world is multipolar, the monetary system must become multi-monetary. We cannot fight in Europe to improve the competitiveness of our businesses...... and have a dollar that is losing half of its value." The French President is not expected to tone down his rhetoric or change his stance. Rather, he may be more blunt in his January 27 speech at the annual forum of world political and business leaders in the Swiss resort of Davos and has already indicated that he planned to work to transform the international monetary system when France takes over the leadership of the G20 in 2011.
The outburst of the French President is largely understandable. The US dollar has weakened considerably against the Euro in the last one year, making euro-priced exports more expensive and putting eurozone producers at a competitive disadvantage. This has posed a considerable problem to most of the businesses in European countries, including France. All these countries would, therefore, like to register their concerns at various forums in order to increase the competitiveness of their exports and France is no exception. It would raise its voice whenever it gets a chance.
However, it must be recognised that the problem is much more deeper and endemic than what it looks like and could only be resolved by an in-depth and objective assessment of the issue, coupled with the highest degree of co-operation among the developed countries. First of all, the very idea of the US dollar to be dethroned from its present position on the basis of personal disliking, needs to be dispelled. The US currency would continue to play a major role in international finance, so far as its economy is predominant at a global level. Its position would automatically be threatened with the emergence of other stronger economies like China and India, whose currencies would also earn respect and be acceptable in world trade with the passage of time.
Also, the very idea of losing or gaining competitiveness does not appear to be very tenable in a freely floating regime where the value of a currency adjusts itself to a changed situation in order to be at an equilibrium level. The recent weakening of the US dollar could be attributed to the worsening indicators of the US economy, including its current account, but this also may pave the way for improving the competitiveness of the US economy. Naturally, US authorities would not like to subordinate their self-interest to European concerns. Based on this premise, so much fretting by Sarkozy may be unnecessary or uncalled for.
However, this does not mean that the international monetary order is perfectly organised and efficiently functioning and there is no complaint about its asymmetry. The recent squabbling between China and US about the appropriateness of the exchange rate of Chinese currency is one of the manifestations of a flawed international monetary order. While the US accuses China of keeping its currency undervalued to promote exports, China blames the US of running high budget deficits, excessive consumption and living beyond its means. In the meantime, the foreign exchange reserves of China and certain other Asian countries are touching record levels, posing a considerable threat to the sustainability of the system.
Underdeveloped countries have practically no voice in the decision-making process with regard to the management of the international monetary regime. The Bretton Woods institutions, especially the IMF, established to ensure a proper exchange rate to maximise the potential of world trade are not in a position to perform their assigned functions due to constant wrangling between the developed countries and their inability to discipline their influential members. Their efforts to popularise SDR in world transactions have also not yielded the desired results. Keeping all factors in view, we would advise world leaders like Nicolas Sarkozy to concentrate their efforts on analysing the whole issue of the international monetary order, including the exchange rate between various countries, from all the angles, with a view to reforming it to the satisfaction of all stakeholders.