A global reserve currency is not just a symbol of power: it is the functional axis of the international financial system. This type of currency is used to set prices, liquidate transactions, issue debt and, above all, provide liquidity. What would happen not to exist? After almost a century of dominance, the leadership of the dollar begins to be questioned, and in Europe the aspiration arises to take its place. An understandable yearning: the reserve currency status has granted the United States «exorbitant privileges», allowing it to be borrowing at low cost and sustaining deficits without immediate punishment. The market consensus is still unlikely that the green ticket is dethroned as axis of global financial architecture. To a large extent, for a powerful network effect: once everyone uses it, abandoning it is extremely expensive. However, his hegemony is insured: already the Dutch Florin in the 18th century and the sterling pound in the twentieth century lost said leadership. More recently, after the collapse of Bretton Woods in the early 70s of the last century, confidence in the dollar only recovered a decade later, when Paul Volcker managed to contain inflation and restore the institutional credibility of the Federal Reserve. And this is where investor speculations begin. Currently, the United States dealt with a rising fiscal debt, while the independence of the Federal Reserve is threatened by the constant attacks of the Trump administration. And the euro? In theory, he is the natural heir – the Yuan is out while China maintains capital controls, central in its current development model. The European Central Bank (ECB) has prestige, the euro zone is large and the common currency does not drag the political chaos of Washington. However, a reserve currency needs more than a good internal monetary policy: a deep capital market is needed, necessarily sustained by safe fiscal assets, and the political space to be the ultimate supplier of global liquidity when the need arises. And several countries in Europe – let's say it without surroundings – do not decide whether to go beyond a successful commercial block and take the step of becoming a unified financial center. What leaves us before an important risk: not who will lead – the dollar or the euro – but, if the confidence in the dollar is eroded, there is no one with the credibility and institutionality necessary to take their place. The economist Charles Kindleberger saw it clear: if no one leads, everything gets disorder. The great depression, in part, was that. The chaos of the 70s, also. We have now been lucky. But this is not a strategy. Sooner or later the world will need a ultimate supplier of global liquidity. What will happen if the silence is the only answer? Alejandro Neut, by BBVA Research.
