Uncertainty poses risks to international monetary stability

As the euro debt crisis spreads with wide ranging implications across the globe, a new report by the World Economic Forum, developed in collaboration with Deloitte and launched in Istanbul, poses three scenarios for the international monetary system in 2030 based on possible policy choices made by the world’s three major currency areas—the euro, dollar, and yuan.

According to the report, Euro, Dollar, Yuan Uncertainties: Scenarios on the Future of the International Monetary System, international monetary stability is at risk due to the uncertainties surrounding the future international roles of these currencies and that the policy choices within each of these currency areas could radically alter global patterns of trade and capital movement.

“It is clear that the current dollar-based international monetary system needs to evolve,” Joseph El Fadl partner in charge for the Financial Services Industry (FSI) at Deloitte in the Middle East, said.

“The widespread view is that the world is moving towards a multipolar currency system based on the euro, dollar, and yuan, but each of these currency areas faces the need for significant internal adjustments that constrain their future international roles.”

The Eurozone is plagued by a weak governance structure, the United States must contend with a dim fiscal position, and China will have to resolve systemic weaknesses in its financial system if the yuan is to rise to international significance, says the report, which offers three plausible and divergent scenarios for the international monetary system including reversion to regionalism: Under this scenario, fiscal challenges in the Eurozone and the United States go unaddressed as policy makers turn inward; slowing global growth and decreased demand for exports make adjustments to China’s growth model more challenging, leading to stalling economic reforms; and trade and financial flows decrease at the global level as countries increase their focus on regional economic ties.
G2 balancing: This scenario is based on a gradual disintegration of the European Monetary Union as a result of political deadlock and stagnating growth; a gradual unwinding of imbalances between the G2 (United States and China); and the increased pressures the continued high consumption in the United States and the growth of China’s consumer economy are likely to place on natural resources.
Reconciling a two-speed world: According to this scenario, as Europe successfully reforms its economic governance and emerges as a fiscal union, markets focus on the U.S.’s unsustainable fiscal situation. Emboldened by strong growth, China actively pursues the use of the renminbi (RMB) for trade among emerging markets. As a result, an alternative monetary order emerges with the RMB at its core, and questions emerge about how to reconcile this two-speed world.

“Currency uncertainties are an increasing concern for businesses from the real economy due to the rapid integration of global trade and capital flows over the past decades. This has made the links that connect different parts of the world economy ever more central to global prosperity while, at the same time, making the international monetary system, as well as the main international currencies that underpin this system, more vulnerable,” Kristel Van der Elst, Head of Strategic Foresight at the World Economic Forum, said.

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