OPN global economy
The current crisis is not just about whether there should be an alternative to the dollar in settling global transactions. A new framework is needed to make things work better. Image Credit: Gulf News

Eighteen months ago, the world was plunged into a tumultuous period, marked by a series of measures and countermeasures and whose outcomes remain uncertain. These have led to significant economic and social upheavals, with many communities, particularly the underprivileged, bearing the brunt.

While the ongoing tensions might pave the way for a new multipolar global structure, its detrimental effects extend far and wide, touching many economies. This includes major powers planning to enter into more disputes, seemingly oblivious to the notion these rarely yield fruitful outcomes. Instead, everyone stands to suffer, a sentiment echoed by the frequent release of concerning economic indicators by major nations.

The US-China economic and political conflict has levied a significant toll on both. Amidst a downturn in China’s industrial production and exports, the credit rating agency Fitch downgraded the US from AAA to AA+ this month, something not seen in a decade. This shift, as reported by ‘Wall Street Journal’, signifies a changing US financial landscape. And a concerning one too.

This sentiment was compounded when Moody’s reduced the credit ratings of 10 small and mid-sized American banks, pointing to their mounting debt, rising financing costs, and diminished capital. Moreover, there’s an ominous hint at potential downgrades for more prominent banks, signalling continued scrutiny.

Beyond these factors, another pivotal aspect centres on the dollar’s position as a global reserve currency. As nations increasingly conduct trade exchanges in their national currencies, the dollar’s prominence has diminished. This shift became especially pronounced after Russia, a significant oil and gas exporter, was excluded from the Swift banking processing system.

In a recent turn of events, Washington permitted certain Russian banks to access this system until November 8. This move suggests efforts to mitigate the impact of transactions in national currencies. Yet, it remains uncertain whether this will prompt a resurgence in the dollar’s global transactions. Or whether an alternative has already taken root.

Far-reaching economic decisions

Conversely, the EU has placed restrictions on Chinese exports, even as the German chancellor emphasized that ‘his country has no intention of boycotting China’.

Highlighting the significance of economic ties with China, Bruno Le Maire, France’s Minister of Economy, Finance and the Recovery and Industrial and Digital Sovereignty, remarked that ‘severing economic ties with China is a fantasy’, especially as European companies suffered a $110 billion loss due to their pullout from Russia, indicating that they are unprepared for another financial jolt.

From Asia’s perspective, Japan expressed its disapproval of Russia’s move to halt tax agreements with nations it deems adversarial. This action comes after the Russian president’s recent decree listing several countries, including Japan, as antagonistic, a characterization that Japan finds unjust.

There are numerous instances of these retaliatory measures that seem to disregard the evolving global economic landscape — an age marked by tech advancement, the information surge, the knowledge-based economy, and ‘smart’ financial transactions. This era offers a plethora of choices, thereby diluting many erstwhile constraints once wielded solely by specific parties.

A global revamp

It means that global economic relations require a revamped financial, trade, and monetary system that aligns with the strides made. The existing system, which has been in place for almost eight decades, is no longer effective. Instead, it hinders international trade and financial transactions, both pivotal in shaping reciprocal relations between nations.

Yet, the transition to a new system mandates unanimous acknowledgement of its necessity. The challenge arises from the resistance of nations that architected the current framework and the reluctance of emerging powers to accept a status quo they view as outdated.

These emerging nations believe that any system should be updated to reflect the evolving balance of power, considering the waning significance of certain countries and the rising prominence of others in the economic and geopolitical landscape.

How can we overcome this paradox? The solution hinges on transcending the present crises and conflicts, steering the world towards collaborative growth. This pathway demands compromises and an acknowledgement of the inexorable nature of change, a constant in the course of historical evolution.