Euro, Dollar and Yuan Scenarios
Wednesday 6th June 2012 - 1:30pm - 3:00pm
international monetary system
Wednesday 6 June
To understand the impact of scenarios of the international monetary system on the mega-region
Insights from the Session
- Under almost any currency scenario, China continues to win.
- The collapse of the euro could lead to civil unrest in Europe.
Participants examined the implications of three possible scenarios for the dollar, euro and yuan. The aim was to examine the economic impact of the various outlooks rather than decide on which scenario was more likely to happen. The scenarios were taken from a World Economic Forum report: Euro, Dollar, Yuan Uncertainties – Scenarios on the Future of the International Monetary System.
Under the first scenario, the international monetary system fragments and breaks up into various regional systems. As a result, the importance of any of the major currencies at the international level decreases. The second scenario saw a rebalancing of the relationship between the United States and China, with the so-called G2 dominating the international monetary system. The Eurozone gradually disintegrates and Europe ceases to be a major international force. Under the final scenario, the yuan emerges as a key international currency, becoming the de facto monetary unit of the BRICS countries. The European Union overcomes its fiscal and political problems, but loses importance as a unit of exchange beyond the bloc.
The idea was to look at the challenges and opportunities that these outcomes could generate from the point of view of business, the financial sector, government and civil society. Participants split into groups – two for each outcome – and not surprisingly, given the complexity of the issues, views differed. The one thing on which most agreed was that China would continue doing well economically given any of the currency outcomes. Nevertheless, some felt this underestimated the importance of political developments in China.
A return to regionalism would impact countries and regions differently, depending on such factors as economic size, the strength of domestic savings and the availability of resources. Global trade would be hit hard and electorates would press for policies to protect local jobs. Overall, the European Union was seen to suffer most, followed by the United States, with China escaping relatively lightly given its high domestic savings.
Elsewhere the consequences would be mixed, with countries in the Gulf, for example, being buoyed by their oil reserves. The story is largely the same for financial services. But this outcome also offers opportunities, with both the United States and Europe getting the chance to re-industrialize. Europe could rethink its policies and institutions. Business could see higher profits in closed economies.
The second scenario was seen as leading to widespread civil unrest over the short term, notably in Europe with the collapse of the euro. Over the longer term, it was seen as negative for the middle classes and disruptive to social support systems. Protectionism would rise and the financial service industries suffer. The way could be open for more radical governments to take power. Others, however, saw the second scenario leading to a better world. Trade flows could increase, together with direct foreign investment, which would be good for business. European countries with a strong technological sector – such as Germany or the Netherlands – could benefit.
Finally, the weaker dollar and stronger yuan and euro envisaged under the third scenario would boost US industry, which would, in turn, help cut the country’s trade deficit. There would be little impact on oil prices, as the United States is largely self-sufficient, but the pricing might be increasingly in yuan. Poverty would fall in Asia. The impact on global trade would be immense. Both Europe and the United States would see their share of world trade decline. The BRICS, the Middle East, North Africa and Latin America would also see trade gains. China would need to expand its banking sector and the City of London would move to Hong Kong.
In the discussion that followed the group sessions, some participants questioned whether the European Union would sum up the political leadership to achieve outcome three. The problem for Europe is that electorates are not yet convinced of the measures that will be needed to save the euro. Others argued, however, that it is precisely at moments of greatest economic difficulty that electorates can be persuaded to make the right choices. The United States faces a similar challenge, with voters seemingly set on policies that could hurt the economy. Nevertheless, the idea that the United States and Europe could both face eclipse seems premature. The currency report forms part of a wider World Economic Forum initiative to help in the remodelling of Europe.
This summary was written by Richard Waddington. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.
Copyright 2012 World Economic Forum
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Keywords: 2012 World Economic Forum on the Middle East, North Africa and Eurasia, Istanbul, Bridging Regions in Transition, Turkey, Euro zone, Rising to the Growth and Employment Challenge, Building Risk Resilience, budgets, trade, employment, currencies, politics, diplomacy, oil
Chun Ding, Dean, Centre for European Studies, Fudan University, People's Republic of China; Global Agenda Council on Europe
Daniel Gros, Director, Centre for European Policy Studies (CEPS), Belgium; Global Agenda Council on Europe
Alessandro Magnoli Bocchi, Chief Economist, Member of Management Team and Investment Committee, KCIC, Kuwait
George Papaconstantinou, Minister of Finance of Greece (2009-2011)
Michael G. Jacobides, Sir Donald Gordon Chair of Entrepreneurship and Innovation, London Business School, United Kingdom
Minister of Finance of Greece (2009-2011)
BSc, London School of Economics; MA, New York University; PhD in Economics, London School of Economi...
Director, Centre for European Policy Studies (CEPS), Belgium
Adviser, European Parliament. Former: Member, advisory bodies, French Ministry of Finance and French...
Dean, Centre for European Studies, Fudan University, People's Republic of China
Professor of Economics. Director, Centre for European Studies, Dutch Study Centre, Fudan University....
Alessandro Magnoli Bocchi
Economic Adviser, Burgan Bank, Kuwait
BA, Business Admin., Bocconi; MBA/MIM, CEMS; PhD, Mgmt Sci., ESADE; degree candidate, Int'l Law, Uni...
Michael G. Jacobides
Sir Donald Gordon Chair of Entrepreneurship and Innovation, London Business School, United Kingdom
Formerly, on faculties of Wharton and Harvard Business School and NYU-Stern; Ghoshal Fellow, Advance...