No Con Economics

Below you will find summaries of six short essays published by Project Syndicate evaluating the potential decline of the U.S. dollar as a global reserve currency and some of the resulting implications. Below each summary, I note (in italics) other important points made in the essay.

May 14, 2025 PROJECT SYNDICATE‘S EDITORS
“If we lost the dollar as the world currency,” Donald Trump told The Economic Club of New York last September, “I think that would be the equivalent of losing a war.” Since beginning his second presidency, Trump has maintained this position, even threatening to punish countries that seek alternatives to the dollar. But his actions tell a very different story.

As Barry Eichengreen of the University of California, Berkeley, observes, Trump has been “risking financial stability, imposing tariffs willy-nilly, and antagonizing [America’s] alliance partners.” But the history of pound sterling – the currency around which the international monetary system revolved before the dollar rose to prominence – suggests that he should be doing precisely the opposite.
Eichengreen argues that if the US wants to preserve the dollar’s status as a world currency, it will need to avoid financial instability, limit its recourse to tariffs, and be a reliable partner to its allies.

When it comes to financial stability, write Nobel laureate economist Simon Johnson and Erkki Liikanen, a former governor of the Bank of Finland, the US Federal Reserve’s independence is vital. Yet, while Trump “seems to have backed down from his recent threats to fire [Fed Chair Jerome] Powell,” he has “claimed complete control over all measures by the Fed other than those regarding monetary policy.” This is already a concern, because “many regulatory decisions” taken by the Fed “are fundamental to financial stability and therefore to the conduct of monetary policy.”
Johnson and Liikanen further note that executive orders that seek to control independent Federal agencies increase the probability of financial instability and make the job of the Federal Reserve Bank more difficult.

The other two problems Eichengreen highlights – tariffs and geopolitical antagonism – are embodied by the Trump administration’s proposed Mar-a-Lago Accord. As Harold James, Professor of History and International Affairs at Princeton University, points out, the Accord would weaponize both trade and US security assurances, with the express goal of weakening the dollar – a goal that the administration believes it can pursue without “destroy[ing] confidence in the greenback.”
James further argues that previous U.S. attempts to achieve job and security initiatives through trade policy and a revalued dollar have failed to yield either sustained policies or the desired economic results.

Similarly, Harvard’s Kenneth Rogoff argues that the logic underpinning the Mar-a-Lago Accord – that weakening the greenback would reduce America’s current-account deficit – is “based on a deeply flawed understanding of the relationship between the dollar’s global status and US deindustrialization.” In fact, the dollar’s role as the world’s leading reserve currency is just “one of many factors contributing to America’s persistent trade deficits.”
In particular, Rogoff argues that until domestic savings (both private and public) exceed domestic investment (both private and public), trade deficits will persist.

But a tarnished greenback creates an opening for others. By sending investors “desperately searching for safe alternatives to US Treasuries,” writes Philippe Legrain, Visiting Senior Fellow at the London School of Economics’ European Institute, Trump’s actions have created an “unprecedented opportunity” for the European Union. A large issuance of common euro-denominated EU bonds, he explains, would “strengthen Europe’s economy, security, and policymaking autonomy.”
Legrain worries that the European Union will have great difficulty overcoming its nationalist tendencies to generate a viable alternative to the dollar.

Similarly, London Business School’s Hélène Rey argues that the eurozone should seize the current moment to “raise the euro’s international profile,” thereby capturing some of the “exorbitant privilege” that the US has long enjoyed – and that Trump is now squandering. If it is to succeed, however, policymakers must take several steps, including deepening the single market in goods and services, completing the banking union and the savings and investment union, and increasing the sovereignty of its own payments system.
Rey cites Charles Kindleberger’s global stability gap as a major concern. When a “self-destructing hegemon” (such as the U.S.) becomes uninterested in providing global public goods and no other entity is willing to fulfill that role, global instability, such as existent between World Wars I and II, is increasingly likely to result. See this recent Free Exchange op-ed in the Economist for a more complete explanation.