The international financial system is in the throes of deep change as a result of the war in Ukraine – and not only. Upheaval is destined to continue. The dollar, reserve currency par excellence, will gain strength, while the euro, despite its aspirations to become the second global reserve currency, still has a long road ahead of it; and the difficult international situation will only contribute to widening the divide between the two.
Indeed, the euro is the expression of a major, yet still incomplete, market, given the lack of both a banking union and a capital market. Consequently, the euro’s strength is limited, although, as it was pointed out, it could turn out to be a global “swing actor” in the pursuit of European economic interests. It remains essential that the EU keep its strategic focus on digitalization and the green transition, since the quality of recovery is as important growth rates. A possible contribution to Europe’s position could come from eurobonds, which have considerable development potential and could contribute to strengthening the euro as a reserve currency.
By contrast, the United States has a very strong financial market, and a Federal Reserve with plenty of leeway to implement effective monetary policies. The European Central Bank has no such margin; indeed, there is no room in the eurozone for monetary policy and, in fact, interest rates are negative. The risk associated with using the dollar as a security policy instrument would be that other important economies might be forced to develop alternatives, although this is certainly not foreseeable in the near term. Reliability is everything for a currency and, in that sense, a global currency cannot respond solely to the national interests of one country or group of countries.
What has no chance of being a reserve currency but, and in the best of all cases, only a means of payment, is the ruble. Due to the sanctions and spiraling military expenses in Ukraine, Russia is in a deep recession; for many participants, it can be compared to the Greek crisis. Freezing the Russian central bank’s dollar reserves was an unprecedented move whose effects will emerge in the coming weeks. The situation is at risk of collapse and Putin’s request that gas payments be made in rubles seems a desperate gesture; nevertheless, the sanctions will almost certainly not stop Putin pursuing military operations in Ukraine for at least several more months or perhaps longer.
Over the medium term, Russia is likely to become an economic/financial “satellite” of China. The Chinese are watching the situation closely, but are moving cautiously in order not to incur collateral sanctions. Beijing’s swap agreement with Moscow concerns only 4% of Russian currency reserves. Indeed, China does not have many options for isolating Putin from the costs of sanctions and for freeing itself of global financial markets, so its interest in being anchored to the dollar zone remains strong.
The Chinese have been working for over ten years now on reforming their financial system and eliminating barriers to the movement of capital. Despite appearances, a recent acceleration of this cannot be explained by the Russia/Ukraine war but is rather part of a long-term plan. China does not yet have a mature international currency and is aiming to speed up the internationalization of the yuan. Not an easy task by any means. The goal in any case is not so much to rival the dollar as to participate in the creation of a multipolar system as well as an alternative financial payments system. Meanwhile, the Chinese central bank recently launched the e-yuan, the first digital currency to enter the international system.
The discussion also included cryptocurrencies and two possible paths they could take. If they are used to circumvent monetary and financial regulations, major governments – including China and the US – will move quickly to block their development; if, on the other hand, they remain a relatively marginal speculative and trade instrument, their impact will be less significant. In both cases, their role is destined to recede at least in terms of their major proponents’ expectations and their many detractors’ fears. Moreover, since they are being used to dodge sanctions, cryptocurrencies must be regulated; the risk of leaving that market to its own devices is either serious crisis or even total collapse.