US Deficit and Sinking Dollar: The Agenda of a New G5
C. Fred Bergsten | International Economy | Spring 2008
The US dollar was for a long time the leading global currency against which all other foreign currencies were measured. The downside of this is that as a result, the USA has accumulated a huge trade deficit. In 2006, foreign goods and services purchased by Americans were worth 600 billion USD more than the goods and services they sold abroad. Every day, the US needs to draw on seven billion dollars of foreign capital so that its currency system remains stable. Without this foreign capital, the country is threatened by recession. In the age of global markets, this would not merely be an American problem. At the same time, the USA does not even need to entirely relieve its deficit. If the deficit was halved, a reasonable relationship between foreign debt and gross domestic product would emerge .
Yet the US deficit is not the only threat to global markets. The fall of the dollar and China's trade balance excess - projected to reach 500 billion dollars in 2008 - also strain the international economy. Other regions with strong currency appreciation are also threatened by trade balance deficits. This is especially true in the Eurozone. At a time when the Deutschmark was the second strongest currency after the dollar, Helmut Schmidt said that the Deutschmark would never overtake the dollar because "West Germany was the size of Oregon." This is no longer the case for the euro. If the USA were to increase its application of trade restrictions to protect its market, there would be a negative influence on global trade. Through the decrease in value of the dollar, the USA does indeed gain competitiveness on international markets (US exports have increased by 12% for the last two years). Yet in other regions, it has become more difficult. This is especially the case in the Eurozone. The more private investors, central banks, and consolidated funds that redeploy their money from dollars into euro, the more the euro comes under pressure.
Different actors are therefore being called upon: the USA and Euro states should develop an emergency plan for the eventuality of a freefall of the dollar compared to the euro. At the same time, they should push for the formation of a compensative fund which would lessen the effect of the transfer of dollars into euro. Asian states should strive for a coordinated revaluation of their currencies against the dollar. As the leading financial institution, the International Monetary Fund (IMF) would be responsible for the coordination of such actions. These measures would be an ideal agenda for the "new G5" that was recently created by the IMF. This group is composed of representatives of the actors cited above and reflects the new global economic order. It would include the USA, the Eurozone, and Japan as well as China and Saudi Arabia as representatives of oil exporting countries. If this group establishes itself, it could in the long run displace the G7.
This summary was prepared by the Atlantic Community editorial team from "A Call for an "Asian Plaza"" published here in International Economy, Spring 2008.
Related materials from the Atlantic Community:
- Sonja Bonin: The First Big Book on the Credit Crunch
- Henrik Schmiegelow: Asia's International Order
- William L. Silber: Will the Euro Dethrone the Dollar?
