Dominance of the US dollar targeted by former World Bank chief economist

A supranational currency is needed to replace the US dollar to prevent global financial crises from recurring, according to a former World Bank chief economist.

Justin Yifu Lin, file photo.

"I think the dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told a breakfast seminar at the Brussels think tank Bruegel on Monday.

"The solution to this is to replace the national currency with a global currency," said Lin, now a professor at Peking University and a leading adviser to the Chinese government.

He said that expanding the basket of reserve currencies — the US dollar, the yen, euro and sterling — will not address the consequences of a financial crisis.

Even internationalization of the Chinese currency is not the answer to rooting out the causes of such a crisis, he said.

Lin also said he is not optimistic about the outlook for the global economy, although there are signs that economies in the United States and Europe have started to pick up.

To boost the global economy, he proposed the launch of a "global infrastructure initiative" to remove development bottlenecks in poor and developing countries, saying this can also offer tremendous opportunities for advanced economies.

Lin urged the international community, especially the US and European Union, to play a leading role in currency and infrastructure initiatives.

"China can only play a supporting role in realizing the plans. The urgent thing is for the US and Europe to endorse these plans," he said. "And I think the G20 is an ideal platform to discuss the ideas," he added, referring to the 20 major economies.

David Bloom, global head of FX research at HSBC, said US monetary policy change "will bring fluctuations for emerging countries' currencies and lead to financial instability".

Chen Wenling, chief economist at the China Center for International Economic Exchanges, a government think tank, said: "A supranational currency may be a new direction for development of the global financial system. It also requires different countries to cooperate in coordinating macroeconomic policies."

Both Bloom and Chen said China needs to play a more important role in global financial governance.

But Bloom said it is difficult for international financial organizations to reach a consistent conclusion on how to improve the foreign exchange system.

He said the renminbi is predicted to be stronger this year, even against an appreciating US dollar, and internationalization of China's currency will accelerate when the government decides to further open the capital market.

Michal Krol, a researcher at the Brussels-based European Center for International Political Economy, does not agree that US dollar hegemony is the root cause of the global economic crisis.

Instead, he said the appearance of other currencies, such as the euro, the yuan and the yen, has created a situation where an adjustment mechanism needs to be in place.

"I don't think that the largest economies and their currencies are at this moment ready for the introduction of a supranational currency," Krol said.

"Neither the EU nor China have financial markets and monetary systems yet that are sound, solid, predictable and well functioning to be the cornerstone for a global system.

"But, indeed, it is time to formulate the fundamentals for global monetary governance."

Pierre Defraigne, executive director of the Madariaga — College of Europe Foundation, said of Lin's infrastructure proposal: "It is excellent, but the problem is how to implement these plans to link those countries that need such infrastructural construction and those with enough foreign reserves, by using an effective global mechanism."

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Li Xiaofei in Brussels contributed to this story.