International financial cooperation is important for the status of the world’s reserve currency

U.S. Federal Reserve Chairman Jerome Powell testifies during a hearing on Capitol Hill in Washington, DC, the United States, December 1, 2020 (Photo: Xinhua)

On December 15, US Federal Reserve Chairman Jerome Powell laid out plans to speed up the withdrawal of multibillion-dollar stimulus and signaled his intention to raise interest rates three times the next year after the end of the reduction of obligations.

A day after the Fed’s announcement, the European Central Bank adopted a divergent policy in that it would step up new emergency bond buying programs to keep the eurozone’s recovery on track. and would not increase its key interest rate, currently set at minus 0.5%, until it ends its net bond purchases. It is “very unlikely” that we will hike interest rates in 2022, noted European Central Bank (ECB) President Christine Lagarde.

After Britain’s two main markets revealed monetary policies in opposite directions, on December 16, the Bank of England (BOE) decided to raise the key rate to 0.25%, from a record low of 0.1 %, becoming the first of the world’s major central banks to raise its benchmark interest rate since the start of the pandemic.

As the BOE tightened monetary screws faster than the US Federal Reserve, the pound quickly strengthened against the dollar. Amid growing concerns about the global economy, investors are expected to see Britain as an island of stability or a safe haven and line up for British assets.

While different approaches highlight the challenges policymakers face when balancing soaring inflation with the renewed risks to growth from the pandemic, the BOE’s action came when increasing cases of the rapidly spreading Omicron variant of the coronavirus has triggered new restrictions ahead of Christmas to stem a wave of spread in the UK.

A natural question to ask: is Britain coming back to usurp American financial hegemony?

“What role should Britain play in the world? On March 16, the British Conservative government published an integrated review titled “Global Britain in a Competitive Age” on the country’s foreign, security, defense and aid policy, touted as the most radical overhaul of the international position. of Great Britain since the end of the Cold War. The integrated review sets out the vision of a ‘Global Britain’, suggesting ambitions far beyond Europe.

With sheer economic weight and nearly a quarter of the world’s population and land at its zenith, the British Empire had been the preeminent world power until World War II.

Since the 1820s, free convertibility with gold has enabled the pound sterling to hold a central place in the global financial world, acting as a measure of value, a medium of circulation, storage and payment, and a reserve currency. global. The pound provided access to London, the world’s largest and most stable financial center at the time. It has also played an active role in promoting international cooperation and stabilizing current account surpluses and deficits. As a result, the British pound dominated the financial world by the end of the 19th century, facilitating transactions for over 60% of trade and 90% of public debt issuance worldwide.

In the wake of the US economy overtaking that of Britain around 1880 and the creation of the Federal Reserve in 1913, the dollar began to gain ground in the aftermath of World War I. The pound sterling gained ground when America was hit by a series of banking crises in the early 1930s. During the Suez Crisis of 1956,Britain was humiliated, the status of the pound as the world’s main reserve currency was eventually replaced by the dollar, and the financial hegemony of the United States took hold.

Over the past decades, a lonely Britain has often been clouded by nostalgia for the lost empire and great power status. The post-Brexit era has launched Britain on a journey in pursuit of “world Britain”, including renewing trade deals with countries from Japan to Turkey, a “switch to Indo- Pacific ”, a region of growing importance for everything from trade to security.

How likely is the pound sterling to regain its lost status as the world’s main reserve currency to the dollar?

Professor Barry Eichengreen of the University of California at Berkeley argues that “size, stability and liquidity” matter most for reserve status, in his article included in the Handbook of the History of Money and Currency. He also points out that the dollar’s status as a reserve currency is due to the fact that the dollar was stable and the United States had the world’s largest and most liquid financial markets and the ability to project military might. and diplomatic.

However, the ill-advised policies taken in Washington in recent years that affect “size, stability, liquidity” have accelerated the decline of the dollar as a reserve currency.

Due to geopolitical calculations, US governments have engaged in the degradation of international financial cooperation, such as the introduction of trade protectionist measures by populist politicians on the left and right, refusing to cooperate with the other major economies of the world, coarsely meddling with developing countries like China on IMF and World Bank reform, boycotting Chinese initiatives such as the Asian Infrastructure Investment Bank. In the long run, such policies have proven counterproductive and undermined America’s growth and the dollar’s position, and tarnished its reputation for reliability and stability.

Against this backdrop, the pound sterling has a reasonable chance of regaining lost ground, but Britain has made similar mistakes.

Britain is still an obviously important power in terms of the “size, stability, liquidity” of financial markets, even if it was no longer the first as in the first half of the 20th century. Among other things, it is now the fifth largest economy in the world and one of five nuclear weapon states with a permanent seat on the UN Security Council.

Completely misled by Chinese skeptics, beneficial Sino-British investments and technology partnerships have been damaged in recent years and hostile measures have been taken against Chinese technology companies, for example Huawei, a Chinese telecommunications giant, has been banned from UK 5G networks.

Suffice it to say that, in claiming financial hegemony, Britain’s primary task is to learn the historical lesson from America’s political mistakes, correct its own policy mistakes, and follow a rule of thumb. that Britain needs to strengthen rather than sever international financial cooperation down the road, especially with the world’s other major economies such as China.

Rather, America’s main task is to maintain its financial hegemony and simply to correct its political mistakes, especially when it comes to China.

The author is an economic affairs commentator. After obtaining a doctorate, he began his career at the University of Cambridge, then moved to the United Nations system. He is the author of numerous articles and books related to economics. His current interests lie in global development and Sino-US ties, especially trade, finance, and technology. [email protected]