How a Great Power Falls Apart
Decline Is Invisible From the Inside
After the election of Donald Trump to the presidency, there were wide expectations that the market would respond negatively to his unexpected victory. And yet stock markets rose globally and remain up today. Bond markets have not unwound as predicted, and overall, business as usual seems to be the order of the day in global finance. In an age of political turbulence, the financial world, at least, seems rather stable.
Perhaps this is not so surprising. After all, during the 2008 financial crisis, though the turmoil originated in the United States, the U.S. dollar went up, not down, and the euro proved itself to be a less-than-perfect substitute as a number of debt crises rattled the European continent. And although China managed to maneuver the renminbi into the International Monetary Fund’s Special Drawing Rights basket (a synthetic reserve that also includes the U.S. dollar, British pound sterling, Japanese yen, and euro), it’s still not an internationalized currency. Lacking substitutes, the dollar-driven order rumbles on.
This special Foreign Affairs’ anthology examines whether, despite this surface calm, the geopolitics of finance has shifted over the last decade, given the near collapse of the world’s banking systems and the rise of populists and nationalists all eager to change the status quo in one way or another. What might be the fault lines in the financial world that could precipitate another crisis, and possible realignments, in the global monetary order?
Our first two contributions from Jacqueline Best and Sandy Hager highlight risks within the U.S.-led order itself. Best explores the much-trumpeted independence of central banks, which is what makes them so effective in managing financial crises and yet renders them so unpopular in a world awash with populist fervor. Hager, meanwhile, looks at whether there could be alternatives to a dollar-led order. The second two pieces take us across the Atlantic to assess the state of the European financial order. Kathleen McNamara warns of the remarkable fragility of Europe’s system. Simon Tilford and Mark Blyth argue, in turn, how fundamental imbalances within the eurozone may split it into two distinct segments over the long term. Finally, Saori Katada and Hongying Wang look at Asian alternatives to the dollar-led order. Katada reminds us of the attempt in the 1990s to make the yen an international rival to the dollar, and highlights the lessons learned from that episode. Wang, meanwhile, discusses China’s reluctance to internationalize its currency.
In sum, the contributors to this special issue have sought to identify the potential weaknesses of our current financial system and whether or not there are alternatives to replace it. For now, it would likely take a particularly unlikely concatenation of negative shocks to seriously challenge the dollar-led order. But then again, so was the 2008 financial crisis, the vote for Brexit, the rise of Trump, and the ability of so many populist movements to muscle their way into power in Europe. Although our analysis suggests more stability than the volatility of the daily news flow would suggest, we should not forget the “tail risk” that such systems generate. Indeed, it’s often in moments where we are most sure things are solid that they sometimes “melt into air.”