The Weary Titan

PARIS – The unfolding “currency war,” which is likely to dominate discussions at the upcoming G-20 summit in Seoul, must be assessed against the backdrop of the new landscape of power – a landscape that has been transformed, in just two years, by the first crisis of the globalized economy.

The economic consequences of the crisis have left a number of developed countries in a severe slump and scrambling to bring about a healthy recovery. By contrast, the emerging-market countries, after a short slide, have managed to re-ignite their growth engines and are sailing full-speed ahead, racking up impressive growth rates.

There have been financial and monetary consequences as well. Although no currency is as of yet qualified to replace the dollar as the world’s reserve and transaction currency, this “exorbitant privilege,” as Charles de Gaulle put it, has come under stealthy attack. In March 2010, the “ASEAN + 3” grouping, which includes China, Japan, and South Korea, established a reserve fund of $120 billion, under the so-called “Chiang Mai Initiative.” This time, unlike in 1997, the United States did not even attempt to torpedo this embryonic “Asian Monetary Fund.”

After coping well initially, Europe entered choppy waters when confronted with the prospect of Greece defaulting on its public debt. The “crisis within the crisis” exposed the eurozone’s weak governance and revived doubts about the viability of a monetary union with large competitiveness gaps between its members.