A new ‘poly’ global reserve currency
Giovanni Tria, Paul Samson and Angelo Federico Arcelli
The US dollar has served as the cornerstone of the international financial system for nearly a century, anchoring global trade, investment and monetary policy coordination. It remains dominant in pricing key commodities, such as energy, metals, and agricultural goods, and as the preferred reserve asset and ultimate safe haven for central banks, pension funds and institutional investors worldwide.
Recently, US debt sustainability has made the dollar less attractive, but without compromising its role. And growing discontent among emerging economies and calls for a more multipolar currency system, have not led to a credible alternative matching the combined credibility of scale, convertibility and trust of the dollar.
While the Trump administration still considers it a priority to protect the US dollar’s role and benefits – particularly lower borrowing costs and the power to impose economic sanctions with global reach – the same US leadership rejects the reserve currency implications that drive persistent trade deficits and upward pressure on the value of the dollar.
To this end, one Trump administration plan is to increase the demand for dollars through supporting private US dollar denominated stablecoins or crypto currencies as a global means of exchange and reserve value. This is a proposal that the rest of the world would be unlikely to accept at scale, given problems for national and international monetary policy and financial stability.
This new pooled currency could be a complementary – not competitive – stable alternative to the US dollar, including for settlement purposes. And, if its purpose was also to facilitate international trade, other currencies might be added over time
An alternative BRICs international currency is not feasible under current conditions, but is there another innovative way to improve the stability of the international monetary system by adding a new, complementary global reserve currency that maintains the role of US dollar at the centre?
Although an improbable short-term scenario given the breadth of agreement required, a potential path would be a managed currency agreement between the euro and some other key convertible currencies. Such a process could introduce a new digital currency—the ‘poly’— based on a basket of linked digital currencies. The euro, Canadian dollar, British Pound and Australian dollar digital currencies could become the core of this basket of currencies, and be available globally.
A new poly would be centred on the euro, which already constitutes about 20 percent of the world’s foreign exchange reserves today. The new poly could be formed on a deal between these four free-floating currencies, managed within fluctuation bands. Such an approach would be like the tried and tested approach of the original Bretton Woods agreement of 1944 and the soft peg to the US dollar until 1971. It would also follow an approach used by the European system and a soft peg to the Deutsche Mark from 1973 until the establishment of the euro in 1998.
This new pooled currency could be a complementary – not competitive – stable alternative to the US dollar, including for settlement purposes. And, if its purpose was also to facilitate international trade, other currencies might be added over time.
A key challenge with the proposal would be the absence, especially in Europe, of a large common debt instrument serving as a safe asset equivalent of the Treasury. However, this might also be a strength from a political point of view, as the US dollar would retain an advantage, with this new proposal of a euro-centred scheme serving as a stability tool and not a competitor.
Markets would likely perceive this new currency to be trustworthy and credible, given the reputation of its members. And since it might take time to scale, it might also be seen as a ‘work in progress’ as was the euro itself for a long period.
If the poly achieved credibility among central banks, it might become like a new reserve currency, which could potentially lessen some of the main negative implications that the US dollar faces as the dominant currency, mainly the excess global demand for dollars. Since reducing imbalances is a clear priority for the Trump administration, creating this new vehicle could build shared interests and even provide a base for a wider agreement with emerging and developing countries.
The G7 might be the right forum to explore options for a new monetary agenda, taking stock of the current US position and allowing the other partners to consider credible alternatives, not as a competitor to the dollar but as needed sparring partner. Maybe over time, the composition and governance of the G7 itself might need to be updated to reflect more common interests and the need for a more proactive global monetary policy agenda.
ABOUT THE AUTHORS
Giovanni Tria is a former Italian Minister of Economy and Finance and an Honorary Professor of Economics and President of the Centre for EuroAsian Studies at the University of Rome Tor Vergata, Paul Samson is President of the Centre for International Governance Innovation and former Co-Chair of the G20 Framework Working Group on the Global Economy, and Angelo Federico Arcelli is a Senior Fellow at the Centre for International Governance Innovation and full Professor at the Università Guglielmo Marconi.
