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Expert Forecasts U.S. Dollar's Preeminence for the Next Two Decades

By Brent Forgues, MA Candidate, Global Finance, Trade, and Economic Integration  

DENVER—Feb. 26, 2015—The U.S. dollar will remain the premiere international currency for at least the next twenty years in spite of the recent gains made by rival currencies, said one expert on international political economy.

Randall Germain, a professor of political science at Carleton University, said that specific political conditions within the United States have facilitated the dollar’s international dominance, which the Eurozone and China currently lack.

“You ought not to put your hope too much in the Euro or the Renminbi as potential rivals to the dollar,” he said.

Germain spoke on Thursday afternoon at the Josef Korbel School of International Studies during a discussion titled, “Rival Currencies in the Global Economy: The Euro, the Dollar, and the Renminbi (RMB)”. 

During the discussion, which was hosted by the Center for the Study of Europe and the World at the Josef Korbel School, Germain said that most academic literature emphasizes the external conditions needed to facilitate the internationalization of any one nation’s currency. However, Germain said this focus tends to overlook the domestic underpinnings, such as democratization and the ability to run a trade deficit, which are needed, as well.

“We think this ignores the important domestic costs that running an international currency generate, and the way in which states are actually able to mediate those costs,” he said.

Running an international currency means also running a deficit, which displaces low-skilled, marginal workers, Germain said. The United States has witnessed this effect throughout the last 30 to 40 years, as American wages have stagnated since the 1970s and competition with China and Japan have hollowed out the U.S. manufacturing sector.

“And so those are real costs that have been amplified or put in place in part due to the way in which the dollar has acted as an international currency.”

However, Germain said democracies have historically performed best at running an international currency through the use of welfare policies. In the case of the U.S., its various welfare and mortgage finance systems have performed well toward mitigating the costs of the dollar’s international receptivity, he said.

“The combination of limited welfare state and financial housing policies have served to meet the costs on the working classes and the middle classes of the United States that running an international currency has generated,” he said.

In comparison, the Euro has been running a current account surplus over the last few years, which dampens the currency’s demand. In addition, the Euro operates under what is viewed as a “repressed” financial system, he said, because it is largely bank-governed. “This really limits its ability to act as an international currency.”

However, the Eurozone is highly liberalized, allowing for large cross-border transactions, which still leads some experts to anticipate that Euro will begin to rival the dollar in the next 5 to 6 years.

“What we see is a currency that will not rival the dollar because it does not have the macroeconomic or the political support that will allow the currency to be used in that way,” he said.

“But there will be an enduring regional role for the Euro.”

As for China’s RMB, Germain said the Chinese also run a trade surplus, maintain financial repression, but unlike the Euro, demonstrate very limited cross-border trade liberalization. Yet there still exists much more global demand for the RMB, as 20% of China’s exports are now settled in its own currency, he said.

“This is a very important strength, and certainly will allow this currency, as it becomes more convertible and liberalized, to increase its use.”

However, Germain said it’s likely China will remain rooted in a state-based economy, rather than engage in the kind of democratization that is needed to encourage wider use of the RMB. 

“That would directly challenge the entrenched political interests of the Chinese state and the communist party,” he said. “And this we don’t see as a very strong possibility.”

Whereas the Euro and RMB fall short in these categories, Germain said the U.S. dollar meets every aspect identified with running an international currency. In fact, he said the greatest challenges to the dollar’s dominance are not external rivals, but rather the continuing threat of dysfunction within America’s political system and widening inequality among its population.

“In that sense, domestic politics is really the most important focus for asking the question of can the dollar continue to be the world’s premiere currency,” Germain said.

“Because that’s really where the critical supports for international currencies are.”

Grant Faze, an MA candidate in International Studies, said he found the discussion interesting and agreed with Germain that democracy is key to promoting a global currency.

“I don’t think you can profess liberal economic policies without doing so politically,” he said.