The entire Cold War financial success of the United Kingdom was predicated on its ability to provide Eurodollars to the financial markets – that is, dollars sold in London and thus, critically, outside the regulatory scope of the Federal Reserve. With the coronavirus pandemic forcing central banks into panicked holding actions, moreover, the status of the Dollar as the Global Reserve Currency seems more entrenched than ever. But is that true? Could the Euro challenge this position, and should it?

The Dollar: Lifeblood of International Transactions

To begin with, let us define what a Global Reserve Currency (GRC) actually is. To put it into simple terms, it is the currency which Central Banks and other financial institutions maintain to prepare for financial actions, ranging from investments to variations in domestic exchange rates. Once a currency becomes used as a reserve all over the world, it naturally becomes a GRC.

Hoarding a single GRC has been traditionally appealing: a reserve currency removes the need to exchange currency every time when doing trade. This naturally reduces the exchange rate risk associated with currency exchanges. Since everyone holds the same GRC, they can do trade with the same currency, which helps facilitate investment and other transactions.

All of this global hoarding has a myriad of net effects. On one hand, it generates a massive import of capital to the issuer country; it increases the demand for the currency and hence increases its value; it allows the issuer to hold ”cheap” debt and ”live beyond its means” to paraphrase former French Finance Minister Valéry Giscard d’Estaing’s comment about the United States. Indeed, the endless appetite for dollars has allowed the United States to run a trade and financial deficit of immense scale, since American debt issues always invariably find numerous willing buyers. It has also allowed countries like China and Russia to avoid inflationary pressure on their expanding economies by siphoning money away from the money supply, through the mass purchase of American bonds.

On the surface, this might sound like an amazing deal: everyone else benefits from a stable currency, trade is facilitated and risks are lowered. The issuing country, meanwhile, gains capital and has access to ”cheap” and extensive financing. When one looks closer, however, one notices that not everyone benefits from this windfall. Capital inflow disproportionately benefits financial institutions, causing an increase in wealth disparity and inequality in the issuing country.

Especially in the current economic context, very few people are holding their breaths to see if the wealth will trickle-down. The gain in demand for the currency leads to the subsequent increased value of the currency. This bloated value damages exports and thus hurts the industry. The financial institutions grow wealthier at the expense of the country’s industrial base. While Asian industry keeps taking up more and more market share from the US, the difference between the industrial sector and the financial sector becomes unbearable, particularly as it also eats at the income and job prospects of the working class.

At present over 60% of bank reserves outside the United States are denominated in US-dollars. The picture is similar for global debt, with dollar denominations holding a share of approximately 40%. The thirst for dollars gives no sign of slowing down. In fact, after the 2008 financial crash, institutions around the world began hoarding dollars, a move exacerbated when the Federal Reserve acted as the lender of last resort to save the Eurozone from collapse in 2012. The same hoarding is taking place today, with the world economy reeling from the shock of COVID-19. One could say that the demand for US-dollars has never been higher than now. However, this hasn’t stopped some commentators from sounding the alarm bells.

The Currencies That Would be Kings

Recently Goldman Sachs strategists have warned that the US Federal Reserve’s reaction to the coronavirus crisis may end up destroying the Dollar’s reign as the pre-eminent GRC. The Fed has increased its balance sheet by around $2.8Tn, an absolutely astronomical amount, and has been busy printing money. A GRC requires for itself a certain level of stability, so that it is easily predictable and so that it carries little risk, but financial strategists are warning that the current monetary policy threatens to debase the currency over the coming years. In such a case there is a threat that the savings held by financial institutions globally will be worth much less than what they are now.

This warning has triggered an immediate market reaction. The demand for Gold and Bitcoin (and other alternative currencies) have soared. “Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” commented Goldman strategists. It is important to note that such warnings have been issued before, and historically betting for the Dollar to fail has been a losing game.

For a long time, the Euro was seen as the next GRC, with Euro reserves seeing global growth and prominence at the expense of the Dollar. This progress came to a sudden halt around 2008, in the turbulent onset of the financial crisis. In the decade since, the Eurozone has shown itself to be a relatively unstable economy, which is one of the key qualifications institutions look for in a GRC issuer. This effectively ruled out the Euro’s candidacy for the time being. For the Euro to truly become a GRC it would require great strides from the Eurozone in terms of ensuring that the bloc is stable, including stricter financial controls and some form of internal debt mutualisation system, both of which are unpopular ideas within the bloc, albeit amongst different groups for each.

China, with their Yuan Renminbi (RMB), is the other natural contender to the status quo. For China, becoming the issuer of a GRC would be a chance to garner more financial independence as their trade would no longer be tied to US dollar issuance – although an alternative policy would need devising to contain inflation. In essence, getting onshore currency from the US is excessively easy. The idea of limiting dollar exports has been raised by some, but it has been noted that this could have catastrophic effects on US inflation rates. China has a myriad of other reasons to become a GRC. It would lower borrowing costs, increase Chinese prestige around the world, support Xi Jinping’s reform efforts, spread exposures of the RMB around the world and finally allow China to become a price setter.

All of this would support the CCP’s goal of creating a multi-polar world where the USA would no longer be a sole hegemon. This drive towards a greater prominence of the RMB has been built on increased Chinese market share of global trade and the addition of the Yuan renminbi into the IMF Special Drawing Rights basket – the basket of currencies which count towards the official reserves of nations. The SDR used to be tied to gold but is now tied to a basket of five major currencies.

The Yuan, however, still faces considerable difficulties. The currency is not fully convertible, the onshore version is hard to come by and no trade-safe asset is available. While both the RMB and Euro have become the reserve currencies of their respective regions – much of the non-EU European countries holding the Euro as their main reserve currency, and Chinese neighbours holding the Yuan or the Japanese Yen – there are significant obstacles for them to reach the status of GRC, even in a multi-polar system.

For the Euro, there are high risks in terms of prestige and economic policy. For example, if China were to peg the Yuan to the Euro, this would have severe implication on the value of the currency and on Europe’s ability to command their own monetary policy. At the same time, the ensuing over-valuation of the Euro could be catastrophic for the European industry, as the currency is already overvalued for much of the union – with the notable exception of Germany. This would also increase wealth disparities and most likely lead to social disruptions.

With all of these considerations in mind, elevating the Euro to GRC status would still lead to higher financial independence for Europe. Whether or not the Eurozone would be ready for the necessary reforms to push through a plan for a GRC – or whether it would even be smart to do so – is still questionable, although the promise of prestige may often be popular among federalist circles.

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Upsetting the balance

Heating tensions have been around for a long time, but we can pinpoint the 2018 G7 summit as the catalyst which triggered the worst of the conflict. The US’s aggressive, almost neo-mercantilist, trade policy headed by the Trump administration has placed the land of the free at odds not only with China but also with the EU and a number of African nations such as Rwanda.

What started as a US-China trade war has now evolved into a US-EU dispute as well. The US wanted the EU to support the US in their trade war against China, by limiting Huawei networks and joining in the USA’s sanctioning and admonishments of the actions of the CCP. On the other side of the Atlantic, though, China and the EU saw an opportunity to unite against Trump’s aggressive trade policies and began setting up negotiations to form a unified front against the US in trade issues.

However, Europe soon found that even a common enemy wasn’t enough for China to adopt fair trading practices. Currently, the European Commission’s web page on trade policy has a civil, yet telling paragraph: “The EU is committed to open trading relations with China. However, the EU wants to ensure that China trades fairly, respects intellectual property rights and meets its obligations as a member of the World Trade Organization (WTO).”

The text very politely implies that the EU doesn’t think that China trades fairly. Indeed there are deep problems with trading in China, everything from the legislation allowing China to exercise control over private companies to mandating that foreign companies have a designated national connection in China before they are allowed to do any business in China.

The EU has until recently allowed Chinese companies to operate relatively freely in the EU, just like other international companies. With no improvement of fair trading conditions in sight, now even the EU has had enough and has begun targetting Chinese companies much like China has targeted European ones, and it is China’s turn to complain. Reciprocity wasn’t supposed to be on the menu.

Will US-EU Trade Relations Keep Deteriorating?

The fallout between the EU and China could (and should) have opened up a pathway for Western powers to mend their broken relationship and form a renewed Trans-Atlantic front. Instead, earlier this year the EU-US trade dispute flared up with new tariffs.

At the end of 2019, the Trump administration announced that it would be placing higher tariffs on a multitude of European goods, especially alcohol and foodstuff – hitting a myriad of products with a 100% tariff. This came as a reaction to the EU’s illegal support of Airbus as well as France’s planned 3% digital tax. Later, in January 2020, France agreed to freeze the plan, as nearly 140 OECD countries negotiated new international tax plans to better account for digital giants like Facebook, Google and Amazon. However, as the COVID-19 drug and vaccine manufacturing disputes arose, France announced it would once again go ahead with the tax plan, which prompted the US to hit the EU with another barrage of tariffs.

Now, while the EU has also responded with a number of retaliatory tariffs on the US, it is possible that European leaders will yield to the US to protect their relationship with the EU’s largest export market. There is a long-lasting bias for favouring exports and demonising imports – stemming from the mercantilist age. This mode of thinking has lasted in the minds of policymakers.

Economics and trade are not so one dimensional though. They cannot be summarized as “exports good, imports bad”. This sort of autarkic way of thinking has caused many nations – from Fascist Italy to the Soviet Union – an endless amount of trouble in their time. Many modern businesses are built around international trade – many of them require imports to function and impediments to imports may cause them to fail, thus negatively affecting the national output of the importing nation. Showing that wealth can be generated from imports.

Looking Ahead

The US and China managed to arrive at a deal settling their trade differences at the end of 2019, which made many hopeful that this would be the end of the year-long conflict. Unfortunately, as the COVID troubles heated up, the trade war heated with it. The US has mounted attacks on China from within the international community, berating them for their early cover-up of COVID and eventually leading to the US exiting the WHO.

At the same time, China has been attempting to bring Hong Kong under control, which has prompted a fresh line of criticism towards the CCP. With the alleged genocide of the Uyghurs, the CCP has seen its fair share of criticism this year. However in a twist of fate, while these wars of words have gone on, both countries have been forced to exempt many of the tariffs they placed on each other out of necessity, as they’ve found that the current situation has increased the need for imports.

The danger in the trade wars between the US and China (and EU and China) is that decoupling economies in this day and age is horribly difficult, and possibly recession inducing. The same warning has been levelled about an EU-US trade war.

The COVID-19 crisis may have put a stop on any major changes in the trade war situation, but it is very possible that after the worst is past the US and China will once again slip into a trade war. While the EU-US war rages on and an EU-China trade war looms over the horizon, pitting each other’s largest trade partners in a cycle of trade battling risks closing Europe into a true Mexican standoff.

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When the novel coronavirus appeared, it must have come as quite the shock when, suddenly, the death toll had already risen into the thousands. Whether this was because of the increase in the number of people of advanced age, or the increase of the number of multimorbid individuals or if the virus itself was more potent is still sort of a mystery. Perhaps, it was all the above. What we did notice was that this virus, this one was a killer. It penetrated our societies and struck at the weakest individuals, taking loved ones left and right. It left scars filled with sadness and anger that had no real direction, so people ended up lashing out at anyone they could possibly blame.

Some lashed out at China for hiding the outbreak. Some lashed out at the WHO that had initially underestimated the potential of the disease based on faulty Chinese information. Others lashed out at the EU for lack of action and others still at their own national governments. Some people even went as far as lashing out at people of Asian descent that had little to nothing to do with the coronavirus outbreak, just to get their anger out.  It was a mess.

Seasonal threat

Recent reports from Africa have suggested that as the sub-Sahara is entering its winter period the virus is making its way there as well. What this has caused researchers to suspect is that the disease might be seasonal. Some people celebrated this news thinking that our ordeal would soon be over, but researchers urged caution. If the virus is seasonal that meant that it would come again. It would kill again. Unlike its predecessor, COVID-19 is showing no signs of just leaving us alone, it has plans and those plans involve staying.

What worries me personally, is the apparent short memory of humanity. When one crisis is averted, we soon forget it. Even when we do prepare for the next one, when the moment comes, we still debate about whether we should deploy our preparations, as was seen with the European Stability Mechanism deployment. I fear that if this novel coronavirus does take a hiatus for the summer, we will once again be lulled to inaction by the sudden peace. Instead, we should be using our breather to try and finish our defences before we get hit again.

A light at the end of the tunnel – with a few bumps on the way

Now, there are multiple drugs that could potentially treat the disease, and vaccines are also in the pipeline. Through our experiences with the H1N1 vaccine, it seems likely that researchers and companies will, out of fear of litigation, not be rolling these out without large scale testing. This means that the earliest vaccines might be anything from 6 months to multiple years away.

Some French hospitals and South Korea have already decided to take the anti-malarial drug hydroxychloroquine into use. However, the hype for the substance brought on by the US President Donald Trump’s endorsement of it has caused many people to try and buy it in bulk and price gougers are likely to try to get their share as well.

It will never be quite the same

The virus is likely to stay with us for years to come, and maybe one day become a normal part of our lives that we vaccinate against and have regular drugs for. For now, though, it is a disease that has crashed the global economy, created a renewed rift between Southern and Northern Europe, brought the Chinese Dragon down from the sky, and revealed glaring problems in the US healthcare system.

The fact that the disease targets the elderly will likely cause a significant shift in the demographics of many countries like Italy, where the average age of those dying is around 81. In a quite horrifying twist of fate, it might even lead to a strengthened economy in some countries, as horrible as that is to say, at a massive cost of life. The scars and anger that people will have after this will most likely shape the global political landscape for years to come.

It is just my hope that the way the world changes is to take the threat of disease more seriously and understand the importance of cooperation and transparency. We would no longer consider diseases as something that go away and never need to be thought about again. A shift from short-term planning to long-term planning.

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