One of the most interesting sideshows of the World Economic Forum in Davos this year was French President Nicolas Sarkozy's attempt to rally the Group of 20 powers to the idea of a more varied monetary system after decades of the dollar's supremacy as the world's reserve currency.

By pure coincidence I have met a few economists during the last couple of weeks who have disclosed some strong views on much the same subject.

Speaking on the sidelines of Asian Financial Forum in Hong Kong, Robert Mundell, credited as the intellectual father of the euro, seemed to support Sarkozy's thesis of weaning the world away from the dollar. He predicted the possibility of the Chinese yuan emerging as a strong international reserve currency in 10 to 15 years when it becomes fully convertible. But the good professor stopped short of suggesting a viable competitor to the dollar for now.

Mundell has always argued that nation-states are not optimal currency areas because state borders are artificial constraints imposed on the globe to create ethnic or historical divisions that do not necessarily represent how international markets operate. To emphasise his argument, Mundell cites former Federal Reserve Chairman Paul Volcker's oft-quoted dictum, "A global economy needs a global currency."

Despite his ideal of a global currency system representative of the world's leading currencies, and the recent European fiscal woes threatening the very existence of the euro, I suspect Mundell still nurses the idea of the euro's emergence as an alternative to the dollar.

Stabilising the exchange rate

He thinks the European Central Bank, along with the Federal Reserve, should stabilise the world's single-most important exchange rate, pointing out that the dollar and euro together represent 40 per cent of the world economy.

"The most important initiative you could take to improve the world economy would be to stabilise the dollar-euro rates," he said.

The reserve currency debate comes at a time when many countries are aggressively letting their currency drop to promote exports and growth, even if that could be at one another's expense.

In a recent paper, ‘The Role of Gold in the New Financial Architecture' Nasser Saidi, chief economist of Dubai International Financial Centre, argued that a single reserve currency issued by a country whose relative economic share is dwindling exposes the world economy to severe instability.

Other options are either a multi-currency system without government intervention or an international currency backed by the world's largest economies. Since the first alternative runs the risk of unlimited exchange rate volatility, he supports a revamped Special Drawing Right (SDR), the IMF's existing synthetic currency, to comprise a basket of currencies and gold.

Apropos of all of which, John Greenwood, Invesco's chief economist and the chief architect of Hong Kong dollar's peg to the US dollar was in Dubai last week. In an interview with Gulf News he said the de-dollarisation of global economy is in no-one's interest in short to medium term, as the euro and SDR are not clear alternatives, while the yuan is a long shot.

Fragmented market

Greenwood rules out the euro and SDR on the grounds of illiquidity. "The euro capital market is still fragmented. Holders of international reserves cannot simply hold euros; they need to hold highly liquid, euro-denominated securities," he said.

Synthetic currencies like the SDR can't displace individual, national currencies, owing to all the inherent problems of pricing and trading in composite currencies. Additionally, the SDR is currently only used by national monetary authorities and supranational bodies including the World Bank and the Bank for International Settlements.

Given China's caution about liberalising its financial system, Greenwood believes the yuan will take a greater international role over a period measured in decades rather than years.

No-one denies Sarkozy has a revolutionary idea in getting the world to ditch the dollar. It's the French way. But if there are no other viable options on the table, that is where the French president and his supporters will find it hard to keep a coalition against the dollar together.