International monetary and financial systems may not be immutable, but nor do they change often. That is why the upheaval spurred by US President Donald Trump’s trade and tariff war is so remarkable – and difficult to decipher. To figure out what is going on, it is worth revisiting Charles P. Kindleberger’s theory of hegemonic stability, which he spelled out in his book The World in Depression: 1929-1939. Kindleberger’s theory essentially states that an open and stable international system depends on the presence of a dominant world power.
In the nineteenth century, that power was Britain. As the world’s financial hegemon – leader of the global economic system and issuer of the dominant international currency – Britain supplied critical public goods. These included, as Kindleberger put it, a “market for distress goods, provided by British free trade,” and a countercyclical flow of capital, produced by the City of London. Britain also supported “coordination of macroeconomic policies and exchange rates,” through the “rules of the gold standard,” which were “legitimised and institutionalised by usage.” Finally, the Bank of England served as a “lender of last resort.”
But World War I took its toll on Great Britain, which by the 1930s no longer had sufficient resources to underpin the international monetary system. And though the United States was an ascending power, it was not yet ready to fill Britain’s shoes. This “Kindleberger gap” – the period between world hegemons – coincided with the Great Depression and the escalating political turmoil that culminated in World War II.
Near the end of the war, in 1944, delegates from 44 countries met in Bretton Woods, New Hampshire, where they orchestrated a smooth transition between the old and the new hegemons. In doing so, they validated the de facto supremacy of US trading, financial, and military power.
At the time, the US accounted for 35% of world GDP. But though America’s share of global GDP has declined, the US dollar has retained its dominance as a reserve asset, invoicing currency, and anchor for fixed exchange rates. Moreover, the US Federal Reserve’s policy decisions and the US economy’s performance still shape the global financial cycle.
Nonetheless, we seem to be approaching a new “Kindleberger gap.” The existing hegemon appears to be self-destructing, as it refuses to supply global public goods, and there is no clear candidate to fill its shoes. The European Union is not prepared to take up the mantle, and China is not even integrated into global financial markets.
Whereas the rest of the world views the dollar’s primacy as an “exorbitant privilege,” the Trump administration appears convinced that global demand for dollar assets is a burden, as it believes it drives up the currency’s value. But if the US continues on its current policy trajectory, it will soon be “relieved” of this burden, whether it likes it or not.
If a currency is to serve an international role, the country issuing it generally needs to enjoy economic preeminence and occupy a central position in global trade. These qualities depend on innovative capabilities and growth potential, with military power and geopolitical alliances also playing a role. None of this is possible without an open economy and high-quality, stable institutions.
By pursuing policies that undermine US institutions, fundamental research, multilateralism, and the economy’s long-run growth prospects, the US under Trump is rapidly eroding trust in the dollar. Never has this been more apparent than in the wake of Trump’s announcement, in early April, of ultra-high tariffs on goods from dozens of countries running bilateral trade surpluses. US Treasury yields rose, the US stock market fell, and the dollar depreciated – a combination often seen in emerging economies.
The economic and financial distress Trump initiated in the US creates an opportunity for the eurozone – which issues the world’s second-most-important international currency – to capture some of the exorbitant privilege long enjoyed by the US. This includes cheaper capital for eurozone governments and businesses – which could support fiscal sustainability – and easier refinancing during times of crises, since demand for “safe” euro assets would rise. It also includes increased geopolitical clout – crucial at a moment when the EU is working to achieve strategic autonomy.
While internationalisation does carry risks, the eurozone is well-positioned to mitigate them. For example, the eurozone’s macroprudential policy frameworks, which are much stronger than those in the US, can help it cope with increased capital-flow and asset-price volatility. Europe also boasts powerful institutions, starting with the European Central Bank, and a robust rule of law.
But more must be done to enable the eurozone to raise the euro’s international profile. For starters, the eurozone must deepen its single market in goods and services, and strengthen its trade relationships wherever possible. Given Europe’s global climate leadership, it could consider starting to invoice climate-friendly products – such as decarbonised energy equipment, electric vehicles, and commodities used in electrification – in euros, while building up corresponding financial instruments (such as those linked to hedging climate risk).
The eurozone should also commit to completing the banking union and the savings and investment union, as spelled out in multiple recent policy reports. To deliver deep and integrated capital markets – crucial for innovation and growth – efforts should be made to deliver a true eurozone-wide safe asset. Joint debt issuance for emergency defense spending could be a good starting point.
Moreover, rather than allowing eurozone payments to remain largely dependent on US payment systems, the bloc must increase the sovereignty of its own. This would probably rely on a central bank digital currency (CBDC), complemented with a robust payment system that may or may not involve euro stablecoins. Finally, the ECB’s function as lender of last resort must be carefully structured, so as to ensure widespread and strong confidence in the euro.
These changes will not be easy to implement. But if Kindleberger taught us anything, it is that the world economy will be better off if, as America retreats from global economic and financial leadership, Europe steps quickly into the breach.
Hélène Rey is Professor of Economics at the London Business School. This content is © Project Syndicate, 2025, and is here with permission.
1 Comments
Blimey - not a single comment yet - even though the subject matter has enormous global consequences.
My 2 CENTS WORTH... #1 It's hard for me to imagine a more establishment, City of London, centric article. To me, it panders to the old world entrenched banking complex, which creates the money supply, usually in the order of ~97% of the MS, when they write up loans out of thin air.
This minuscule percentage of the population charges unearned rent on this privilege, fostering a parasitic financial economy at the expense of the working class. This is the very essence of post-industrial neo-feudalism.
Until the system changes, from a debt-based fiat Ponzi scheme, into one where capital and liquidity are created as credit in a wide-ranging public utility model, nothing will change.
#2 Draghi, of all people, in the referenced article is framed as a worthy advisor for a new vision - how is this, when he was one of the architects of the EU's existing debt-trap spiral. ... quoted...
"Mario Draghi – former European Central Bank President and one of Europe's great economic minds – tasked by the European Commission to prepare a report of his personal vision on the future of European competitiveness."
We would do well to remember his advice was called upon as to whether or not the West should freeze and then eventually thieve $300 billion worth of Russian central bank reserves. At the time this was almost half of Russia's total reserves.
Brilliant, Ursula, Mario, and Janet - when you took this track you subsequently informed every country on the planet that they need to be extremely careful where they place their reserves and in what form they hold them.
These funds included $3.4 billion held by the Belgium clearing firm Euroclear. The West has since engineered loans and payments to Ukraine from the interest on these frozen Russian assets.
As the Italian PM at the time Mario Draghi, along with Janet Yellen the idiotic U$ Fed Chair, and later Treasury Secretary, advised the Brussel's based Ursula von der Leyen* to go ahead with what will transpire to be a major blunder - arguably eclipsing even Captain Chao$ as a major catalyst for a global transition towards de-dollarisation.
*(President of the EC, European Commision - the appointed - read unelected - head of the most patently undemocratic executive governance model ever devised)
In fact, the West has done such a sterling job on that drive, that the BRICS need not even bother - hence their ho-hum narrative at the moment - dollars held by them and under their control are useful and liquid during this transitional period.
Remember too, that the EC, a ludicrous CIA-inspired creation, is the sole body that can propose or draft bills to become EU law.
Leyen described Israel as "As a "vibrant democracy" in the Middle East that made "the desert bloom". In October 2023, 841 EU staff signed a letter to von der Leyen criticising her stance on the Palestinian/Israeli conflict.
It stated the commission was giving "a free hand to the acceleration and the legitimacy of a war crime in the Gaza Strip" and warned that the EU was... "losing all credibility and the position as a fair, equitable and humanist broker"
#3 As the author of this paper indicates, von der Leyen is also a massive 'Green Deal' cheerleader. This is another poorly planned policy that has helped to hollow out the EU economy.
This self-evisceration was aided by the U$ when they demanded that the EU cut itself off from Russian gas and effectively commit financial suicide.
The US made this irreversible when they bombed the two Baltic Sea NS2 pipelines and effectively quadrupled the price of gas in Germany, the main industrial powerhouse of the entire EU economy. The two NS1 pipelines never delivered any more gas to Europe after 31 August, 2022.
#4 A fixation on "debt issuance for emergency defence spending" is farcical - there is no emergency, other than what the Russiapobic MIC warmongers have concocted in their heads.
This type of thinking is one of the principal reasons why the US, AKA Rome II, is on the brink of collapse - they spend the equivalent of ~$1.5 trillion - all up, this is more than the next 70 countries' budgets combined - all blown on obscene military overreach.
#4 "The European Union is not prepared to take up the mantle, and China is not even integrated into global financial markets."
Why is there ZERO mention of the massive BRICS bloc which ~87% of the world's population is itching to join - it is becoming progressively more and more integrated into global markets, by the day.
My understanding is that it was never intended that the BRICS would introduce a new "CURRENCY", let alone a new reserve currency.
What they envisaged was a financial INSTRUMENT, not a currency as such - whatever they decided to call it, the 'UNIT' perhaps - it would only be used by member countries as a means to settle out net trade imbalances.
The vast majority of trade would be conducted bilaterally between member countries in their national currencies independent of the Brussels-based and now weaponised SWIFT system - this negates the use of the U$ dollar and the need for holding reserves for this trade.
My expectation is that very soon the BRICS countries will hard-back their currencies, and so there will be minimal risk in holding them as reserves or accepting them in trade deals.
#5 The assumption appears to be that the national reserve system should continue because for centuries the world has always had an extremely dominant global reserve currency - one that is also a national currency - why is this, when they all fail miserably in the end?
Given the many reasons for this failure, apart from inevitable bad habits developing and tendency for the incumbent nation to weaponise their privilege, there is the well-documented Triffin Paradox which all but guarantees that substantial trade deficits will accrue.
IMO the one thing that Keynes got right in his career was that he identified this problem, and proposed the 'Bancor' as a solution - this was not proposed as a national currency - it was to be a financial instrument.
Long story short, his idea was not adopted and the US dollar became the new reserve currency. It survived from Bretton Woods in 1944 until 1971 - a mere 27 years, when it blew to pieces and Nixon removed it from its gold backing, only for it to be replaced by the Petrodollar scam which is now on its last legs too.
CONCLUSION
My take home is clear - the article pushes a set of 'solutions', that in my view are the very reasons why the Western fiat casino model is an abject failure and is right now teetering on the brink of total collapse.
The fact that the BRICS financial/security juggernaut doesn't even warrant a mention presents a major credibility/bias issue for me.
Colin Maxwell
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