"Euro potentially faces a favorable situation"
Rewritten Article:
Donald Trump's economic policies are shaking up the global monetary and financial systems, but understanding their impact requires a peek into the theory of hegemonic stability, as proposed by American economist Charles Kindleberger in his book "The World in Depression: 1929-1939."
Simply put, a stable international economic system relies on a dominant economic power. In the 19th century, Britain held that position. But, weakened by World War I, it could no longer support the international monetary system. As the US had not yet taken over, the world experienced a transitional period without clear leadership – a "Kindleberger gap" – that coincided with the Great Depression and the political chaos that led to World War II.
After the war, in 1944, the Bretton Woods agreements established the US as the new hegemonic power. The dollar became the preferred currency, the main invoicing currency, and the anchor of many exchange rate regimes.
Now, it seems another Kindleberger gap is on the horizon. The current hegemonic power is turning inwards, abandoning the provision of global public goods that have bolstered its legitimacy. No other power appears ready to take the mantle: the European Union is still finding its feet, while China remains largely outside the international financial markets.
By pursuing policies that are counterproductive to its own interests, the US risks losing its exorbitant privilege associated with the dollar – whether it wants to or not. For a currency to prevail, its issuing country must hold a central position in global trade, exhibit strong potential, and enjoy robust alliances.
The Kindleberger Gap and Trump's Policies
Trump's "America First" approach has widened the gap by undermining multilateral institutions and norms, which are crucial for maintaining global economic stability.
A Void in Leadership
The US's decreased willingness to lead global economic initiatives has created a void in leadership, inviting other countries or blocs to fill the gap.
Increased Instability
The reduction in multilateral cooperation and the rise of protectionism have increased global economic instability, further deepening the Kindleberger gap.
The US Dollar
The US dollar's status as the global reserve currency has served as a cornerstone of American economic power. Trump's policies could undermine this status.
Risk to Dollar Hegemony
Trump's confrontational foreign policy and diminished support for allies have weakened trust in the US dollar as a stable reserve currency, potentially leading to decreased demand for the dollar.
Shift Towards Alternative Currencies
Countries may turn to alternative currencies, such as the euro or yuan, for international transactions, further challenging the dollar's dominance.
In essence, Trump's policies have exacerbated the Kindleberger gap by reducing global leadership and increasing instability while also threatening the US dollar's role as a reserve currency. This puts broader implications for American hegemony on the line, potentially leading to a shift towards a more multipolar world order.
- The Kindleberger gap, initially observed after World War I, suggests a transitional period without clear leadership, and it appears another one is on the horizon due to the US's current policies.
- Donald Trump's economic policies, such as his "America First" approach, have weakened the US's global leadership role, creating a void that other countries may seek to fill.
- The US dollar, as the global reserve currency, has been a cornerstone of American economic power, but Trump's policies could undermine this status, leading to a decrease in demand for the dollar.
- The reduction in multilateral cooperation and the rise of protectionism under Trump's administration have increased global economic instability, further deepening the Kindleberger gap.
- In light of these developments, alternative currencies like the euro or yuan may become more appealing for international transactions, challenging the US dollar's dominance and potentially leading to a shift towards a more multipolar world order.