For Kindleberger, financial dynamics are not inherently stable. It requires a leader, a hegemon, who, through their actions, guarantees it, giving it the characteristics of a global public good. All countries can benefit from financial stability without any country being penalized.
The absence of this public good creates a risk of instability and high costs. This is what Kindleberger discusses in his book on the Great Depression in the 1930s.

For this public good to exist, the guarantor must be integrated into the global economy, must play a driving role in growth and innovation, must benefit from stable institutions, and must have strong geopolitical alliances. Examples include the United Kingdom in the 19th century and the United States after World War II. By meeting these conditions, the hegemon’s currency can be a reserve currency, and its assets can be risk-free assets.

We can then see the dynamics of financial stability. In the event of a shock, investors will rush to the hegemon’s risk-free assets, revaluing the dollar and the price of risk-free assets. As a result, central bank reserves are revalued, providing additional intervention capabilities to reduce the risks of financial system fragility and contagion effects. The hegemon’s central bank can, like the Fed, establish liquidity lines to further enhance this ability to stabilize the economy. This is the part I mentioned yesterday in Part 3.

The simplified dynamics presented are often accompanied by large-scale interventions by the hegemon’s central bank. We recall the Fed in October 1987 or after the Lehman bankruptcy in 2008.

Today, investors may have doubts about the United States’ willingness to fulfill this role. Washington’s executive orders, tariffs, and isolationist dynamics could ultimately result in a loss of confidence in the dollar and risk-free assets.
The absence of a leader capable of ensuring stability would have far-reaching consequences for the global economy, but neither China nor the Eurozone are likely to replace the United States and the dollar.

For the Eurozone to be a candidate, it must implement all the reforms discussed over the past year and the publication of the Letta and Draghi reports to renew its capital for growth and innovation.
Europe has strengths: a powerful ECB, and the euro is the second-largest reserve currency. It must also have benchmark assets to serve as a safe haven, hence the importance of the Capital Markets Union.

Writing in the Financial Times, Hélène Rey believes in the Eurozone’s ability to take over and implement the necessary reforms. There is an opportunity to seize to avoid the risk of chaos.

To be continued