A Unique World Currency: Geopolitics, panacea, idealism?

02Ene10

By Ricardo J. Martínez Rivera
For IPEC

Translation from the April 10, 2009 post

“The dollar continues to be the reserve currency of the world”

Timothy Geithner, Secretary of the Treasury of the US

“In the long run, having a sole international accounting currency different from the dollar could be an advantage for us.”

George Soros, Hedge Funds and Forex expert

In the advance of the G-20 summit (April 2009), the idea of a single global currency (SGC) was forcefully advocated by both Russia and China.  The governments of both nations propose the creation of such a currency (the Globo) as an alternative to the US dollar for international exchange transactions.  On the surface, this proposal may be regarded as yet another move in the geopolitical chessboard, a more careful pragmatic analysis is warranted given the constant resurgence of the idea as a reactive measure during stock-exchange crashes (1929, 1987, 1998).  In this light, the notion of a single currency seems closer to   the mindset of the Bretton Woods system and John Maynard Keynes’ Bancor than to the understandings that guided the creation of NAFTA and the World Trade Organization.  We attempt to examine this proposal objectively by juxtaposing the arguments of those who are in favor of the idea and those who are eager to dismiss it.

Yeas!

The argument in favor of the creation of a single trading currency rests on the premise that with a fluctuating currency, accurate governmental, organizational and business financial planning would be impossibility for the simple reason that it cannot accommodate for the  relative value of one currency against another in terms of minutes, months, and years.  Since August of 2008 alone, the euro has experimented more than 20 appreciations against the US dollar fluctuating in a range of 1.60 to 1.24.

Such have been the views of former presidential candidate and US congressman Ron Paul (R-TX),  who is heavily influenced by the Austrian economic school of thought.  Congressman Paul has gone on the record multiple times  saying that the current system (End the Fed),  one where the US dollar   is the fiat currency of choice,  is nothing more than a collection of band-aid remedies that has allowed the US to avoid the typical consequences of its  current accounts deficit.  Cogressman Paul, as well as most economists from the Von Mises Insitute, consider this monetary regime nothing short of a political monopoly of the money supply.

Nays!

Although the establishment of an SGC promises to be a stabilizing agent in the global economy, valid arguments do exist in opposition.  There are some who believe that in order for an SGC to thrive, the existence of a functioning supranational regulatory entity  is imperative.  To achieve the single currency stage, the European block had to overcome certain milestones that the rest of the world has yet to address (achieving little or no progress since the Doha Round impasse).  These stages are:

1. Liberalization of trade restrictions
2. Customs union and common external tariffs (in the SGC’s case it would be substituted by the abolition of tariffs worldwide)
3. Macroeconomic and legal convergence
4. Political union
5. Monetary fusion

Certainly, many national governments would be reticent to cede economic sovereignty and monetary autonomy to a degree that would hinder their ability to respond to shocks in local markets. Nevertheless, in the case of the EU, every country ceded proportionately to achieve a common goal, the euro.

Abstain?

American economist Kenneth Rogoff believes that it may not be necessary to force the process towards a SGC, arguing that it may arise gradually.  Rogoff affirms that a consolidation of currencies, most likely to include the dollar, the euro, and the yen (DEY) will occur with the role of the yuan remaining to be seen.  The level of interrelation both in capital and the exchange of goods that takes place through theses currency agents will in the long run, according to the argument, allow a certain level of fusion and/or coordination in world monetary policy. Interestingly enough,  the euro and the dollar have a relationship that (according to the economist Jesús Lizcano from the Universidad Autónoma de Madrid) is best described as one of “semi-parity” .  If sufficient political will exists between both sides of the Atlantic,  this relationship could evolve into one of full parity where the exchange risk is greatly reduced if not completely eliminated.

With all of this in mind,  it could be said that the implementation of a SGC would require a certain convergence of policy goals where benchmarks are established in respect to worldwide inflation averages, unemployment, wage standards, monetary supply, and other relevant macroeconomic variables (i.e., price of commodities).    Such a convergence seems improbable in the current geopolitical climate.

The economic crisis that began in 2007 led to an increased awareness of global economic interrelationships.   Nonetheless, much progress needs to be made on international trade agreements before world currency issues can be discussed in more concrete terms.  Progress on the international trade front would probably involve  1) a sustainable quid pro quo where the US and the EU relax restrictions on agricultural sectors, 2) the willingness of developing countries to open their financial and service sectors to firms from developed countries, and 3) a significant portion of all major industrial powerhouses accept a mutually beneficial working model of “cap and trade” emissions trading.  In conclusion, caution should be exerted regarding the Russo-Chinese proposal.  As it is known, China has generated a large volume of US dollar reserves due to its success in maintaining an  artificially devalued currency; a pattern that has generated revenue as a result of direct foreign investment as well as  a de facto subsidy on all its exports.  This reality translates into a fairly restricted position for the Chinese to maneuver at the negotiating table.

Filed under: BRICs, Diplomacia, economia mundial, economia usa, Escuela Austriaca, globalizacion, internacional, política monetaria, politica internacional, Uncategorized   |  1 Comment