WASHINGTON (CN) – World Bank President Robert Zoellick predicted Monday that the United States will play a smaller role in a “global economy that does not rely so heavily on the U.S. consumer” and seemed to favor giving the U.S. Treasury, not the Federal Reserve, more power to regulate the financial market. He also signaled that the U.S. dollar could lose its place as the world’s primary reserve currency, a forecast that some viewed skeptically.
In his speech at John Hopkins University, Zoellick talked about the recent global economic meltdown, saying it would likely shift the balance of power in the world economy.
Zoellick said many nations, including China and the United States, may have trouble adjusting, but stressed the importance of maintaining free trade despite the temptation to raise import tariffs.
“So far, traditional trade protectionism has been a low-grade fever,” he said. “But the temperature is rising.”
He noted that the U.S. dollar – the currency most widely held by foreign governments to back their own currencies – could be replaced as the primary reserve currency. As such, the dollar is widely used to price products on the world market, allowing the United States to buy commodities without paying exchange fees and borrow money at a lower rate.
“Of course, the U.S. dollar is and will remain a major currency,” Zoellick said, said the euro or the Chinese yuan could become the primary reserve currency.
“There will increasingly be other options to the dollar,” Zoellick said. “There is every reason to believe that the euro’s acceptability could grow.”
European institutions and the euro, which is shared by 16 nations, may emerge from the global economic crisis stronger than before, he predicted.
And China, which issued sovereign bonds to offshore investors for the first time this month and recently allowed foreign companies to list stock in China, could also expand the dominance of its currency, Zoellick said.
“I expect China will be inevitably drawn outward,” he said.
But Liliana Rojas-Suarez, a senior fellow with the Center for Global Development, was skeptical of such a transition, at least in the short term.
“The truth of the matter is, there is no clear alternative for the dollar as a reserve currency,” she said, and went on to explain why the Chinese yuan and the euro, some of the runners up, would not be suitable.
“Europe is not politically united,” she said, referring to their different fiscal perspectives. “They would never agree.”
And she noted that the Chinese yuan is still under Chinese capital controls. “There’s not full freedom to convert,” Rojas-Suarez said.
Besides, the Japanese and Europeans wouldn’t want it, she added. If other countries stop buying U.S. treasuries as a form of investment, she said, there would be a huge transfer of resources out of the United States, and exports from Japan and European countries would diminish.
Ultimately, Zoellick linked the dollar’s value to the “extent to which we see the return of a dynamic, innovative private sector economy.”
The difficulties many countries face is how to handle the recovery without inflation rising, he said.
“In the United States, it will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority,” he said. He indicated that regulation power should instead be given to the Treasury Department, which is subject to congressional and public oversight.
“The United States … has been hit hard by the crisis,” Zoellick acknowledged. “But America has a culture of resilience to setbacks, adapting to new circumstances and remaking itself.”
He urged other nations to prepare for the inevitable “next upheaval,” which he said would stem from the economic power shift.
Zoellick said China will have to focus more on internal needs than exports. And oil-rich nations, such as Russia and Latin American countries, will have a tough time building economies as more governments fight to reduce oil dependency.
The United Nations and the World Trade Organization reported earlier this month that global trade would fall 10 percent this year due to slowed economic growth.
“Zoellick is just saying something that everybody knows, which is that the world is growing and it’s growing fast,” Rojas-Suarez said. In her view, the United States is still a significant economic player; its GDP is simply shrinking relative to the world because of rapid growth in other countries, particularly China.
The World Bank president’s speech comes a week after G-20 leaders pledged to avoid protectionism and agreed to give developing countries more say in the International Monetary Fund and the World Bank.
It also comes a week before the World Bank and the International Monetary Fund’s annual meeting.