PARIS (Reuters) - This week’s G20 summit will demonstrate how fast the balance of power is shifting from the old U.S.-led economic order towards emerging market nations, although it is way too early for a productive debate about a new world currency.
Beijing is pushing for more power in key institutions such as International Monetary Fund and, more dramatically, China and Russia are both saying it is now time to consider shifting away from a dollar-dominated world.
While the immediacy of the worst economic downturn since the Great Depression may leave little room for conclusive discussion at the summit, Beijing and Russia have already opened the debate about a more fundamental shift in the global economic order.
In one sense, their timing is right, because the entire world is hit by a crisis that snowballed out of the United States.
In another, it is awful because nobody at the G20 summit really wants to fray financial market nerves any further.
“The rich countries are going to have to move over and make room,” says Dominique Strauss-Kahn, head of the Washington-based IMF. “It’s not a battle that’s won in two hours but it can start at this G20.”
Moscow has called outright for the G20 to start looking for alternatives to the dollar as the world’s main reserve currency, and Russian President Dmitry Medvedev renewed that call over the weekend.
“It is quite obvious that the existing currency system has not coped with the existing challenges,” he told the BBC in an interview, relayed by the Kremlin website. www.kremlin.ru
China, key because it is owner of the world’s biggest stock of foreign exchange reserves, went public with much the same argument in a speech delivered last week by central bank chief Zhou Xiaochuan.
Does all that mean the idea will start to gain traction any time soon?
Not at the London summit in any case, it seems.
According to an aide of French President Nicolas Sarkozy, it will simply not be discussed by leaders, if only because the summit aim is above all to reassure scared financial markets and voters, not dent the dollar.
“It might be a good thing in the longer term but right now it is perhaps best the dollar doesn’t drop too much,” said the official.
As for the merits of a new reserve currency though, there is no shortage of economists who think it could make sense.
A UN panel published a report last week which said that an alternative reserve currency system based on the SDR, a unit of account used by the IMF, could help contribute to global financial stability and strength.
Indeed, Nobel Prize-winning economist Joseph Stiglitz, who headed the panel, believes such a replacement currency system could feasibly start to be phased in within as little as 12 months, even if he acknowledged that was unlikely.
Stephen Green, a China economist at Standard Chartered bank, says Zhou’s speech was a milestone.
“Whether or not the reserve currency question progresses beyond an intellectual debate, it’s clear that China has decided the time is ripe to become proactive in the debate,” Green said in an investment research note to his bank’s clients.
The problem is that despite reaching out to the emerging economic powers, the West is also in essence saying power imposes obligations and that means ‘pay up if you want to play up’, whether it is China, Russia, Brazil, or Saudi Arabia.
British prime minister and summit host Gordon Brown said as much during a G20 promotion pit-stop in New York recently.
Countries that had built up massive currency reserves, such as China, could afford to put them to better use, he said.
“We’ve got 7 trillion (dollars) (5 trillion pounds) of reserves around the world. Probably for the sake of financial stability you need maybe only half of these reserves. The rest can actually be far more effective in being used to get growth into your economies.”
“If we could find an insurance policy which guaranteed for these countries action in the event of their currency being in difficulty, that in my view would satisfy half the problem that is being raised by China and Russia,” he said.
Editing by Ruth Pitchford
Our Standards: The Thomson Reuters Trust Principles.