World Economic Forum, 2011.
The rapid integration of global trade and capital flows over the past decades has made the links that connect different parts of the world economy ever more central to global prosperity. Yet the practices and institutions that regulate these links – the international monetary system – as well as the main international currencies that underpin this system are increasingly challenged. Against this backdrop, it is clear the current dollar-based international monetary system needs to evolve. But how it will evolve is highly uncertain. 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, fragmented sovereign debt markets and an uncertain growth outlook. – The United States must contend with a dim fiscal position, a persistently large trade deficit and a political system at risk of resorting to protectionism. – If the yuan is to rise to international significance, China will have to ensure continued growth, resolve systemic weaknesses in its financial system and address limitations stemming from its system of capital controls. These adjustment processes play out as complex two-level games. While at the global level synchronous and coordinated adjustments between individual players may be desirable, the challenges they face at the national and regional levels may direct them to take decisions that can lead to sub-optimal global outcomes.
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