“Every ten years, it is decline time in the United States,” wrote journalist Josef Joffe in 2009. Yet the story of U.S. decline has constantly turned out to be the story of the boy who cried wolf. Time and again the United States has shown that its leading position in international politics, what some have classified as a hegemony, is unique and capable of withstanding a variety of economic, political, and security crises.
What is distinctive about U.S. hegemonic endurance, however, is that it does not rest primarily on coercive power, international regimes, capitalist ideology, or sheer wealth. As data shows, U.S. relative power is declining in all of the aforementioned dimensions. Yet this is not the case when it comes to the U.S. global monetary centrality. Even in times of severe economic and monetary crisis, such as the breakdown of the Bretton Woods system in 1971, or the Global Financial Crisis in 2008, we have not witnessed such a decline. In fact, quite the opposite is true. The U.S. dollar fortified its global centrality after each and every crisis. This remained the case, currently as well, during the global pandemic of 2020–22 and its related economic aftershocks. Recognizing the link between monetary centrality and overall international influence is critical if the United States policy is to sustain U.S. power globally.
Predictions suggesting that perhaps the euro, renminbi, or IMF special drawing rights (SDR) would replace the dollar have not panned out, primarily because the system surrounding the U.S. dollar reinforces its centrality. But what if the fundamentals of that system were displaced through a new modality of currency—a change not simply in who stood behind the currency but a change in currency form itself? Our research indicates that this prospect is what should concern American decision-makers and those that rely heavily on American centrality.
Two of the most often evoked substitutes for the U.S. dollar are the euro and the renminbi. However, both lack the market, institutional, and geopolitical fundamentals for such an endeavor. As such, they do not generate confidence, which is the crucial criterion for a currency to be central to global economic activity. Both alternatives remain subject to greater uncertainty, and thus reliability, than the U.S. dollar.
Looking at the euro first: the European financial system is still dependent on the United States and the U.S. dollar. U.S. financial markets account for 30 percent of the movement in the euro financial markets, whereas the number is only 6 percent in reverse. The eurozone lacks a clear authority. In contrast, everyone knows that behind the U.S. dollar is a political entity and an institution that makes decisions and vouches for those decisions. Who is the Euro’s political head, who is the Euro’s guarantor? There are no eurobonds. Lastly, the euro does not reach beyond its region. Almost two-thirds of all Euro “banknotes exports” stay on the European continent as they are obtained by non-eurozone European states, and only 50 percent of EU trade is invoiced in euros. Benjamin Cohen stated in 2009: “Europe’s money in a sense could turn out always to be the ‘currency of the future’—forever aspiring to catch up with the dollar but, like an asymptote, destined never to quite get there.”
Regarding the renminbi, Standard Chartered Bank’s index of renminbi globalization displays global stagnation since 2015. There is no genuine global demand for the renminbi. This is not a surprise as the Chinese economy’s foundations are underlined by demographic decline, falling labor productivity, issues with transparency and property rights, housing and financial bubbles, and rising debt. Institutionally, China lacks the political will to change domestic policies that would enable the renminbi a greater global role: open financial accounts within the balance of payments, floating not managed exchange rates, full foreign access to China’s asset market with legal and property rights, and central bank independence. It is difficult to see how China might move forward with necessary reforms since party elites, state-owned enterprises, and local governments that currently dominate China’s political economy all have everything to lose with such relaxation. Moreover, Chinese foreign loans are by and large denominated in U.S. dollars, not in renminbi. China is thus a bank-driven economy, which is potentially prone to burst. Again, fundamentals that do not inspire confidence.
A Crucial Threat: Central Bank Digital Currencies
A third, and we argue a more likely threat to U.S. dollar centrality, are Central Bank Digital Currencies (CBDCs). Our claim rests on the assumption that cryptocurrencies indicate a changing nature of the economy—akin to the introduction of fiat money or financial economy.
By and large, there are three types of cryptocurrencies: private cryptocurrencies, stablecoins, and CBDCs. Although all are tokens of a new era (pun intended), only the latter present a challenge for the U.S. dollar, while the first two suffer from embedded flaws that will cap their potential preeminence.
Private cryptocurrencies such as Bitcoin suffer from several deficiencies contributing to their volatility and, in the words of former IMF director and current Europen Central Bank president Christine Lagard, “le Bitcoin, ce n’est pas une monnaie.” They do not function as a currency (i.e. as a store of value, unit of account, and medium of exchange). Rather, they should be understood as (risky) financial assets. Stablecoins are digital assets that are pegged to a traditional currency. So, when the latter moves, this puts pressure on the issuer of the former to assure the peg. There are legitimate empirical doubts if stablecoins can deliver when the situation will be dire’—i.e. if each stablecoin can indeed be backed by its respective currency.
Finally, there are CBDCs. Our proposition is that it would be incorrect to assume the digital economy and digital monetary relations as merely an extension of the traditional economic world. Although the actors are the same in both worlds, their respective power is not. It is possible that the fundamentals in the digital space can reset and therein lies the threat to U.S. global monetary centrality. The relations between the state, individual, private bank, and international relations will be profoundly impacted by the introduction of CBDCs. Although the political and legal authority is not questioned when it comes to CBDC, its revolutionary potential comes in a new source of monetary power and monetary relations.
Specifically, CBDCs potentially can leapfrog the intermediary role of private banks, which has been a mainstay of traditional economic activity. Under fully implemented CBDC arrangements, efficiency and profitable economic activity may dictate that citizens and business hold their electronic wallets directly with a central bank. In other words, private banks could potentially run out of business as the transactional activity of economic exchange bypasses them and central banks managing CBDCs become direct support institutions. Policy surrounding the introduction of CBDCs is not being coordinated globally. This could exacerbate market forces driving a change in this fundamental institutional arrangement. Central banks are closely observing each other’s CBDC activities. Some even cooperate in pilot projects and research. Yet, even joint research about an interoperability system for CBDCs, the most advanced is the mCBDC endeavor, does not constitute nor assure a coordinated approach in designing the international CBDC architecture.
Perhaps the best example of how the introduction of CBDCs could threaten the centrality of the U.S. dollar is the eurodollar market. This market has been a crucial mainstay reinforcing U.S. dollar centrality. But what would a digital eurodollar market look like? Would this market even exist under the architecture of no intermediate banks? If not, then what would generate preferences for the usage of e-dollar not e-euro nor e-yuan? There are multiple scenarios and designs of how CBDSs can be introduced. We can assume that there will be a period of trial and error, in which multiple alternative architectures will exist. These are the questions and challenges that the United States needs to face if it wishes to solidify its global economic centrality.
One of the reasons why no one challenges the greenback is that there is no alternative. In the emerging digital currency economy this is not the case. The advantages of the real U.S. dollar are not transcended onto the e-dollar automatically. Potentially, the e-yuan, the Chinese CBDC, could have a first-mover advantage. If e-yuan really takes off as an internationally leading CBDC, then China would be in a good position to determine the rules, standards, and economic trends of CBDCs globally. Or in other words, China would center the global digital economy around itself—which in fact is essential for hegemony.
Although the e-yuan project has several deficiencies, the United States should not be a passive observer assuming its traditional dollar advantages will hold against this new technology. Ultimately, setting up an international CBDC order will not be a consequence of “being the first,” but “getting it right” if U.S. policy recognizes how this all relates to its position in the world. Questions of security, personal freedom concerns, a transparent legal framework, universality, and the very manner in which a CBDC is introduced (token or account based) can outweigh the first-mover advantage—but only if the United States positions itself in a strategic fashion. Whatever the Chinese do technically, it will not be simply adopted by others without the aforementioned ethical and political considerations. Therefore, the United States should step up with its own CBDC project as part of an international strategy.