Macron's criticism of dollar dominance

"Paris resents the power of the dollar, which secures "exorbitant privilege" for the Americans. However, there is no alternative in sight: neither Europe nor China can supply them.

On the return flight from Beijing to Paris, Emmanuel Macron gave an interview to several media in which the French President, in the tradition of Charles de Gaulle, presented himself as the advocate of European sovereignty, which is expressed not least in a pronounced verbal distance from the United States.

Macron wanted to address a domestic public that was hostile to him because of the pension reform, and where anti-American sentiment is traditionally felt. The interviewee is also likely to be France’s partners, not least the German government, which has been demonstratively emphasizing its closeness to the United States since February 2022 and has shown little commitment to a Franco-German axis.

From an economic perspective, Macron's criticism of the dollar's leading role in the world financial system is striking. France has been more bothered by it than Germany since de Gaulle's time.

The global role of the "greenback" is not primarily based on a supposedly unchallengeable dominance as a transaction currency: According to statistics from the service provider Swift, the share of the dollar in global payment transactions in January 2023 was 45 percent compared to a respectable 33 percent for the euro. All other currencies lag far behind; this also applies to the renminbi with a share of 1.3 percent in eighth place.

The Origin of Dollar Dominance

The dominance of the dollar is primarily due to its importance as a global investment and debt currency, from which a considerable influence of American monetary policy on the world economy is derived.

A look at the statistics published by the International Monetary Fund on the currency reserves held by central banks gives an impression of the power of the dollar: the dollar leads here with a share of around 60 percent, followed by the euro with 20 percent.

Other currencies are almost irrelevant, including the fifth place renminbi with a share of almost 3 percent. The euro share of 20 percent corresponds only to the former share of the D-Mark. No class of securities has a validity comparable to US Treasury bonds; no stock market is as large and liquid as the American one.

As a debt currency, the dollar remains in demand, not least in emerging markets. There, governments and companies like to take out dollar loans because of the lower interest rates, while most of their income is in their home currencies. Crises can arise from this constellation if interest rates in America rise sharply and the dollar appreciates sharply against the home currencies. The practice, branded an "original sin" by experts, highlights a channel through which US monetary policy affects financing conditions in the global economy. That's not all: The economist Hyun Song Shin has shown how American monetary policy influences the performance of global supply chains via the financing of the working capital of international companies.

Fear of "arming the financial markets"

According to the theory of hegemonic stability, it is no coincidence that the dominance first of the pound and later of the dollar established itself with the world status of the British Empire in the 19th century and the world status of the United States after 1945. The political, economic and military power of the two countries complemented each other with private property rights, liquid and attractive financial markets and a currency system characterized by the free movement of capital.

This order is advantageous for the United States as the most important provider of investments that are perceived as safe - the old Parisian thesis of an "exorbitant privilege" for the dollar already applies. But it also has advantages for other countries as long as the hegemon sticks to the rules. America did not do this when, from the mid-1960s, it was inflating the world economy because of the Vietnam War and national social policies. 

Today, Macron is not the only one expressing concerns about "arming the financial markets" with sanctions that restrict the free movement of capital.

 

Nevertheless, America need not fear for the role of the dollar: China may have the power for an alternative, but not the courage for the inevitable liberalization of capital transactions. 

 

Europe lacks the political and military power and a common capital market, as well as an internal coherence that removes any doubts about the durability of monetary union.”

 

The author is wrong. If the only difference between China and America is the  the free movement of American capital, and American sanctions restrict the free movement of capital, then all thinking of the author is wrong. Practical conclusion - load up with Chinese money. Additional benefit - this helps avoid runaway inflation, and crisis in the West. No such thing in China and Russia so far.