Euro/Yuan/Dollar rivalry : The new currency war

Date de la conférence : 07 April 2021

The economic crisis, brought on by the health crisis, is not only accelerating trends that have already been at work for a decade, it is also exacerbating tensions, particularly between the American and Chinese powers. These power struggles, which also involve Europe, are visible at all levels, particularly in the financial and monetary spheres. To rebuild their economies hit by the global pandemic, the respective governments have adopted recovery plans, not without effects on the value of their currencies, interest rates, the level of inflation and the robustness of international payments.

The April 7, 2021 webinar is part of the Fondation Prospective et Innovation’s new cycle that focuses on the first year of Joe Biden’s presidency, with an emphasis on the relationship between the United States and the rest of the world, especially Europe.

Alongside Jean-Pierre RAFFARIN, former Prime Minister and Chairman of the Fondation Prospective et Innovation, Jean-Paul BETBEZE, economist and Founder-Chairman of Betbeze Conseils, Christian NOYER, Honorary Governor of the Banque de France, Michael BLOCK, Managing Director and Special Advisor at Adit Ventures, David BAVEREZ, Managing Director at Aryes Capital discussed the financial and monetary aspects of the current crisis, with the central role that the dollar continues to play.

Two particularly salient points emerged from the discussions:

1. Towards the Thucydides trap and a confrontation between yuan and dollar: between continuities and ruptures

In the race for power, indicators of wealth and growth are particularly revealing.

At first glance, it is the United States that remains in the lead with a Gross Domestic Product that amounts to nearly 21.4 trillion dollars, compared to 14.3 trillion for China. The dollar is also, by far, the most traded and most guarded currency on the globe, accounting for almost 88% of trade and 60% of reserves, compared to 2% for the yuan. The hegemony of the American currency is also based on the confidence it enjoys thanks to its stability and the weight of its central bank. Foreign countries, notably Europe and China, prefer to build up their dollar reserves, borrow and invest using the US dollar. The dollar has become the master of the international monetary system and a reference model for the world. Thus, American hegemony results above all from the primacy of the dollar, which is used to serve the extraterritoriality of American law.

However, on closer inspection, the US victory is less clear-cut than it appears. While the US economy suffered a 3.5% contraction in GDP in 2020, its worst year since 1946, China remained the only major T 2 economy with positive growth in 2020. So the still fresh belief that the US and Chinese economies would be equivalent by 2040 is invalidated as being too timid given the current reality. Current trends predict that the Chinese economy will catch up within 10 to 15 years. So, for the Chinese, the current health and economic crisis could well be the last lap of the dollar, to the benefit of the yuan. If the 2008 crisis had the effect of bringing China’s power into the international monetary system, the 2020 crisis will reinforce it. The fall of the dollar and the subsequent rise of the yuan can be explained by the arrogance shown by the United States thanks to its reference currency. Because at the same time the Chinese are looking to their past to learn from their mistakes. Unlike the Americans, the Chinese are very much afraid of a return of inflation, which recently caused social unrest in their country. Therefore, it is important not to politicise the central banks and to monitor the money supply, which should not increase by more than 10 to 15%, in order to be in line with the nominal evolution of Chinese GDP. However, while China is worried about inflationary pressures, Joe Biden has just signed a historic stimulus package amounting to nearly 1,900 billion dollars.

Finally, the balance of power between China and the United States is permeated by international fears about the extraterritoriality of US laws. The dollar is threatened internally by US sanctions. These challenge the sovereignty of dollar holders or users. As for China, it still suffers from a lack of trust and credibility.

2. What place for Europe and the euro in this global dialectic ?

In the midst of the health crisis and the tug-of-war between the dollar and the yuan, the rise of cryptocurrencies is looking brighter than ever. Although the battle between new currencies (bitcoin, diem, libra…) and old currencies is not won, it is changing the rules of the game. The new currencies are disruptive in that they are private and not political. These new currencies imagine themselves competing with the dollar or the yuan, in particular the diem, launched by Facebook, which was intended to be more stable than the dollar. Central banks also want to start developing electronic currencies, as shown by the deployment of the e-RMB in China, which aims to offer an alternative to the dollar settlement system.

Yet while the current price of Bitcoin suggests a bright future for cryptocurrencies, their lack of a solid foundation clouds the picture. Firstly, they do not fulfil the three primary functions that currencies are supposed to serve. They are supposed to serve as a unit of account, a store of value and an intermediary for trade. However, the new currencies are not universally accepted, and their dependence on financial prices violates the store-of-value clause. Cryptocurrencies are also based on speculation and are considered more as assets than anything else. Finally, their environmental cost is enormous.

Thus, because crypto-currencies are unable to end the hegemony of the dollar due to their nature, the euro is emerging as the sole and true competitor to the dollar and the yuan. It already has infrastructure, the confidence of international markets and a significant weight in the world economy. The euro would then be the greatest strength of the European Union, whose monetary and fiscal policy has become more solid and whose role has intensified in recent years, as shown by the signing of the Sino-European agreement.

In a world where economies and currencies compete in zero-sum games, the international economy can only be saved through foresight and multilateral agreements. Appeasement, trust, benevolence, common orientation and the development of new markets, especially in Africa, are notions that must imperatively govern the economic decisions of the three world powers. The planning and adoption of the Paris climate consensus as a new thinking matrix resonates well with this imperative of multilateralism.


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