Column : Not the euro & not the renminbi

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: One thing that has come out of the financial crisis is a new world economic order. Or so at least the many people who dislike America are hoping for. They are still angry about George W Bush, if not the very existence of the US itself.

Visceral anti-Americanism is one of the few things that remain to unite the Left so there is much cheer in midst of the gloom. If capitalism is not to collapse in their lifetime, people wish at least the American hegemony would end.

Many analysts are predicting that economic power will pass from the US to China, from the West to the East. The dollar will decline as a key currency and a multilateral economic and financial order will emerge.

But the consequences of success are as difficult for the winner as for the loser. Thus, dollar can only lose its pivotal position in the reserves of most countries if there are other currencies to take their place.

Euro is one such candidate currency but the problem with the euro is that unlike in the case of dollar T-bills, there is no EU authority which issues eurobonds which countries can keep in their reserves. So countries have to buy German or French or worse yet Greek and Italian bonds if they wish to have euro.

The EU itself has a budget which is only 1.27% of its GDP. It also has a strict budgetary rule so deficit spending is not allowed at the EU level. So the supply of EU eurobonds is nil.

China has the same problem. The renminbi is not fully convertible and foreigners do not have full freedom to buy and sell Chinese assets. The Central Bank of China has offered Rmb swaps but no full convertibility. Indeed, since last year it has also stopped the Rmb floating against the dollar and gone back to pegging.

This is to preserve the value of its multi-trillion holdings of dollar assets. As Keynes said if you owe your bank a thousand pounds you spend a sleepless night but if you owe them a million they spend the sleepless night. The Chinese may be powerful but they are terrified about the collapse of the dollar.