Episode 262: The Bankers' Bookshelf - The GeoEconomics of Money
Breaking Banks Europe
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In today’s rapidly evolving global economy, the landscape of international reserve currencies, monetary systems, and payment infrastructures is undergoing significant shifts. Central to these changes is the growing tension between traditional systems, emerging geopolitical forces, and the rise of digital currencies. In this article, we explore the ideas discussed by Nicola Bilotta , Senior Research Associate at the Florence School of Banking and Finance, in a recent episode of The Bankers' Bookshelf for Breaking Banks Europe that recently spun off to its show available at: https://provoke.fm/show/the-bankers-bookshelf/, hosted by Paolo Sironi roni. Drawing on insights from his book The Geoeconomics of Money in the Digital Age, Bilotta provides a comprehensive analysis of the forces driving transformation in the monetary system, the rise of digital currencies, and the implications for global economies.
The Role of the US Dollar and the Quest for Alternatives
The dominance of the US dollar in the global financial system has been a source of geopolitical and economic discontent for years. From developing economies to major powers like the European Union, dissatisfaction with relying solely on the dollar has been mounting. The dollar’s strength is built on a foundation of economic power, stable institutions, and global trust, but it also acts as a double-edged sword. For years, no viable alternative has emerged, creating stability in an otherwise unstable world.
However, the situation is shifting. Bilotta notes that the advent of US economic sanctions—on countries like Russia, Iran, and North Korea—has prompted many nations to seek alternatives. Countries such as Indonesia and even major players like Saudi Arabia and India have begun looking for ways to move away from the dollar. These nations are not merely seeking to replace it with the “best” option; rather, they are exploring second and third-best options due to the lack of a comprehensive alternative. This has set the stage for smaller, incremental shifts in global trade and finance, where nations gradually diversify away from dollar dependency.
Economic Dislocation, Geopolitics, and the Role of Technology
Three interconnected forces—economic dislocation, shifting geopolitical relationships, and advancing technology—are shaping this transition. Bilotta emphasizes that these factors are driving countries towards finding alternatives to the US dollar. Economic dislocation, brought on by trade tensions, shifting supply chains, and the fallout from the pandemic, has made nations reconsider their dependency on traditional financial infrastructures. Geopolitical shifts, especially between major economic players like the US, China, and the European Union, further contribute to this fragmentation. But it’s technology that plays a pivotal role in enabling new payment systems and creating new infrastructures for currency exchange.
The traditional dominance of the dollar has been reinforced by network effects—how currencies are linked to global trade, financial transactions, and consumer adoption. These network effects create inertia, making it difficult for other currencies to gain traction. However, technological innovation can challenge this inertia by enabling new payment methods and cross-border exchanges that are independent of traditional intermediaries.
The Role of Central Bank Digital Currencies (CBDCs)
One of the most talked-about developments in recent years is the rise of Central Bank Digital Currencies (CBDCs). As Bilotta highlights, CBDCs represent a digital version of cash, issued directly by a country’s central bank. They are distinct from commercial bank money, which is what we commonly use in digital transactions today. The adoption of CBDCs signals a move by governments to take control of monetary policy in an increasingly digital world.
There are two main types of CBDCs: retail CBDCs, which are accessible to all citizens, and wholesale CBDCs, used primarily by financial institutions. Countries like China and the European Union are already leading the charge. China, for instance, is motivated by domestic concerns about monetary policy control in a cashless economy. By introducing its digital currency, the ECNY, China aims to maintain monetary sovereignty in the face of rapid digital payment adoption by private companies like Alipay and WeChat Pay.
The European Union, on the other hand, sees its digital euro as a way to achieve strategic autonomy. The EU has been heavily dependent on US-based payment systems like Visa and Mastercard. By creating its own digital euro, the EU aims to build a common payment system that can serve as a pan-European infrastructure, reducing reliance on foreign payment giants and ensuring greater financial sovereignty.
Why the US Has Been Slow to Enter the Digital Currency Race
In stark contrast to these advancements, the US has been slower to adopt a digital dollar. While the Trump administration was outright skeptical, even the Biden administration has approached CBDCs with caution. The US is wary of the potential for a digital dollar to become a tool of government surveillance and control. In fact, many policymakers in the US see the digital dollar as a direct threat to personal freedom and financial privacy.
The hesitation is compounded by fears of losing its global financial leadership. The US dollar remains the dominant global reserve currency, and its slow uptake of digital alternatives could indicate a reluctance to cede this control. Bilotta notes that the US is conducting internal experiments and cross-border collaborations with CBDCs, but they still lag behind other countries like China and the EU in terms of progress.
Fragmentation vs. Global Coordination
Looking ahead, Bilotta suggests four possible scenarios for the future of monetary systems:
The Missing Piece: Economics and Monetary Transformation
While technology plays a significant role, Bilotta cautions that technology alone won’t drive this transformation. Economic and political motivations are the primary forces that will shape the future. The real challenge lies in integrating these technological advancements with sound economic policies and maintaining political stability, especially in a multipolar world order.
Bilotta’s insights are based on his book The Geoeconomics of Money in the Digital Age, which provides a thorough examination of how these forces intersect and drive change. His work goes beyond technical discussions of CBDCs and explores the broader economic implications—how the shift in payment and currency systems will impact global trade, financial markets, and economic stability.
The world of money is undergoing a significant transformation driven by technology, economic dislocation, and geopolitical shifts. Central Bank Digital Currencies (CBDCs) represent just one part of this transformation, and countries like China and the EU are moving ahead to create sovereign digital payment systems. In contrast, the US, despite its global financial dominance, is cautious and slow to adopt. As Nicola Bilotta discusses, the future of money will likely involve a mix of fragmentation and local solutions, with technology enabling new financial infrastructures. The ultimate outcome will depend on the political will and economic strategies that countries pursue in the coming years. This conversation is not just about currency; it’s about reshaping global trade, financial stability, and economic sovereignty in the digital age.
?? Watch the full episode here: https://youtu.be/Ih7K96M90Jo
Nicola Bilotta is the coordinator of the EU-SDFA and a Senior Research Associate at the Florence School of Banking and Finance and an Associate Fellow at Istituto Affari Internazionali (IAI). Previously, he led research on digitalisation and global economics as a Senior Fellow at IAI. He also worked as a Senior Research Analyst at The Banker Research Team (Financial Times), as an Adjunct Professor at the LUMSA University, as a Visiting Fellow at the Centre for Strategic and International Studies.