World standard currencies: will the euro be next?
5-6-2008 | Other news
Recently, I discussed the future of the dollar. My conclusion was that the world economy is approaching the end of the dollar era. It will certainly take a couple of years or even longer to get there, but the time of the US-dollar as the world’s anchor currency is coming to an end. The following question of course is: what next?
To answer this question, it is important to understand the circumstances in which a currency can rise to the position of the world’s foremost value standard. If we glance back in time, in previous centuries there have been two currencies that have played a role comparable to that of the US dollar after WWII.
The first was the Dutch guilder during the 17th century, the Dutch Golden Century. The Dutch GDP at that time was only a modest 1% of world GDP. However, its GDP per capita was the highest in the world. The Netherlands had one of the best developed financial centres and its maritime power gave it a military and political influence far beyond its share in world GDP and population. Finally, an open attitude to international trade underpinned the position of the guilder as the Western hemisphere’s foremost currency.
Later, in the 19th century the British pound sterling became the world’s first true global currency. The UK’s GDP at the end of the 19th century was more than 9% of the world GDP. This was half the share of China, but including the rest of the Empire, this share substantially increased to comfortably more than 25%. Again, a high GDP per capita, well-developed financial institutions, an open attitude to trade and the Royal Navy ruling the waves underpinned the prominence of the sterling. Just as in the Dutch case, this position gradually eroded, and a shock, in the British case WWI, accelerated the currency’s decline.
The US position immediately after WWII was comparable to the heyday of the British Empire. Dominant in all economic, financial, military and political aspects with no real competition in the free world, the position of the dollar was uncontested.
Today’s situation is rather different. Although the strength of the dollar has fundamentally eroded, the positions of Europe, Japan, China or India are a long way from anything that resembles the dominance of 19th century Britain or 20th century America.
What does this mean for the global currency markets? First, that the dollar will only slowly give up its importance. Secondly, that we are entering a situation in which the world financial architecture no longer has a single anchor currency. We are entering uncharted waters.
Dr. Wim Boonstra, Chief Economist Rabobank Group
Dr. Boonstra has published numerous articles on banking, financial markets, international economics and business cycles.
