Raise the Bismarck! – MarketWatch

LONDON (MarketWatch) — Who will shape the world of the future? Surely it can’t be the played-out, hacked-about, used-up industrial countries of the West.

It’s the emerging economies that’ll rule the roost. That’s all the more remarkable, then, since the new nations likely to gain the upper hand go under a name that harks back to the 19th century.

Yes, you heard it here first, folks. Prince Otto von Bismarck is on his way back. He’s the man who pulled the strings when Germany was first unified in 1871 after the Franco-Prussian war — and, of course, the namesake of that ill-fated World War II German battleship.

Less melodramatically, though, he also was the founder of the German welfare state, because he thought up the idea of old-age pensions in the 1880s as a way of keeping the Left off the streets and out of government.

With a few tweaks, the initials form his name: Brazil, India, South Africa, Mexico, Saudi Arabia, Russia, China and Korea. These are the main emerging market economies within the G20 group meeting in Pittsburgh next week. And they are the ones whose currencies could be so much in demand over the next 5-10 years that they could collectively displace the dollar.

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The acronym is the brainchild of Ousmène Mandeng, an economist with London emerging market fund manager Ashmore (ASHM). Mandeng, who previously worked at the International Monetary Fund, wants to promote wholesale reform of the global currency system. And why shouldn’t the Bismarck Bloc within the G20 take the lead?

Many international economists as well as the leaders of China and Russia — and Germany, too, come to think of it — agree the world needs a more diversified monetary system, less reliant on the dollar.

The solution: important reserve-holders in Asia and the Middle East, as well as the old, established European central banks, should increase their holdings of currencies from the emerging economies. Arguably, that would help financial market stability as the world moves its asset holdings more in the direction of the countries that account for an ever-greater proportion of trade.

One condition is that emerging market government agencies and central banks encourage borrowing in their currencies through bonds and bills that can be held in other countries’ reserves. Still more important, the currency itself has to be good enough to be held as a reserve asset.

To make emerging currencies capable of supporting monetary instruments that major central banks might hold in their reserves, they need to be fully convertible. China and India must move the furthest and the fastest here. No stability-oriented central bank will hold the Chinese renminbi as a full-fledged reserve asset unless it can access a freely tradable currency linked directly to functioning internal Chinese capital markets.

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So there’s a long march ahead. But things are definitely moving. IMF chief Dominique Strauss-Kahn, giving the Bundesbank’s annual lecture in Berlin earlier this month, held out the prospect of a multi-currency reserve system in which the renminbi could play a role as a “co-equal” alongside the dollar and the euro.

So who knows? Maybe on April 1, 2015, we will celebrate not only the 200th birthday of Prince Otto, the Iron Chancellor, but also the creation of a new monetary order as a neo-Bismarckian system rises up from the ashes of the old.

David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.

View more information: https://www.marketwatch.com/story/bismarck-may-be-raised-in-new-monetary-order-2009-09-21

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