In 2000, father of the European Union’s euro Robert Mundell, talking about the future of the USD-dominated international monetary system in a lecture entitled The International Monetary System at the Beginning of the New Millennium
, said that inevitably people would create a common international currency or return to the gold standard, or form large monetary unions.
Â
Mr. Mundell’s idea is finding more and more adherents of recent.
Â
Days before the G20 London Summit Meeting, to be held on April 2, Russia has suggested the introduction of a super-sovereign reserve currency, saying the London meeting should consider the feasibility and importance of the IMF’s Special Drawing Rights (SDR) as such a currency. Before this, on Monday, Governor Zhou Xiaochuan of China’s central bank had expressed a similar idea.
Â
Expand SDR Currency Basket
Â
The value of the current SDR is derived from a basket of currencies including USD, Euro, Yen, and Pound, accounting for 44%, 34%, 11% and 11%, respectively, for the period from 2006 to 2010.
Â
Zhou Xiaochuan clearly stated China’s interests, that China’s RMB should be included in SDR’s currency basket, and that GDP should be a factor in deciding the currencies�percentage in the basket. China is making no secret of the fact it wants to gain more influence in the international monetary system.
Â
Zhou added that the basket should include currencies of all major economies in the world. In fact, he is calling for the creation of a new global currency on a wider basis while maintaining the name SDR. The new SDR would be different from the current SDR in currency structure and weight.
Â
Of course, which currencies would be eligible for the valuation of the new SDR and how much GDP would be a factor in deciding the percentage of a country’s currency in SDR’s basket are political questions as well as economic and financial. Who would be charged with supervising, measuring, and recognizing the GDP figures of these countries? Zhou says this needs political cooperation from all member countries.
Â
Learn from the European Currency Unit
Â
Zhou Xiaochuan’s scheme for a "super-sovereign reserve currency" and "international currency" sounds very similar to European Currency Unit, the precursor to the present day euro.
Â
Conceived in 1979, the ECU was an artificial currency used by the member states of the European Community, later the European Union (EU), as their internal accounting unit. Weights of national currencies in the ECU basket were decided by their trade and GDP as proportions of the EU’s totals. After almost twenty years, the ECU was superseded by the euro, the single currency to replace sovereign currencies inside the euro area.
Â
Zhou Xiaochuan’s idea can be interpreted as the plan to establish a global currency unit similar to ECU, and as ECU finally developed into the euro, the new SDR might also become the world’s new single currency.
Â
Mundell’s theory of optimum currency areas, with support from the foundation of the euro, may also guide the establishment of the new global currency.
Â
Recently Mundell has appealed for the establishment of a common currency on the basis of the experience of the euro. Mundell once said in China that a common currency should be established on the basis of currencies of all the world’s major economies, including USD, euro, Pound, Yen, and RMB, and that IMF can be transformed into the world’s central bank.
Â
"We now need a global currency. Every year since 2003, I hold meeting in Italy to discuss how to found a world currency. We expect to promote the global currency during such a crucial time. I talked with leaders of some counties. French President Sarkozy and British Prime Minister Brown are both supportive. Relevant Chinese officials are also very interested. An IMF meeting, similar to the meeting at Bretton Woods, may be held in 2010 in Shanghai, together with the World Expo, to promote the global currency scheme," Mundell said during an interview with China Business News.
Â
If the idea of super-sovereign currency and SDR reform from countries such as China and Russia is discussed at the G20 meeting, the construction of the global currency may be a step closer to being put into practice.
Â
Â
Â