ACCUMULATION VS. SOVEREIGNTY.
The headline of the Australian Financial Review of 13 September 2000 read `RBA backs currency union'. The Governor of the Reserve Bank of Australia has come out in support of Australia and New Zealand sharing a common currency. This followed the New Zealand Prime Minister stating that New Zealand adopting the Australian dollar as its domestic currency `might be inevitable' (itself an interesting concept). International mergers and acquisitions happen even in central banking.
Today, there are many cases of small countries adopting a major currency, especially where there is geographical proximity. Panama and Liberia have, from their independence, adopted the US dollar. Several other central American countries have recently been contemplating `dollarisation'. The South African rand is legal tender in Lesotho and Namibia. Bhutan uses the Indian rupee. Several former Soviet republics, now independent nations, still use the Russian rouble.
As debates about the Euro showed, currency unification also relates to wealthy countries. It plays out a now standard conflict over globalisation: a logic of accumulation versus national sovereignty.
The supposed benefits of currency unification, simply stated, are twofold. First, in cases where a central bank is unable for some reason to secure a stable monetary system, the adoption of a currency like the US dollar provides a (generally) stable solution.
The second case for currency unification, applying to the advanced capitalist countries, is where different nations are integrated economically by extensive flows of goods and services, finance and investment (and perhaps labour). This is the situation that led to European currency unification. It is also the situation for Australia and New Zealand. In these circumstances, different currencies are thought to create unnecessary uncertainty. Exchange rate movements create windfall gains and losses for traders and investors -- or they add to the costs of having to hedge against uncertainty.
Extending this case some distance leads to the proposition that countries should adopt the US dollar. The US dollar is the major world currency for trade, credit and investment. If companies are heavily exposed to the US dollar by these means, it is simpler overall if all their costs and revenues are in US dollars. This is the case for dollarising the world.
The argument against monetary unification is about sovereignty. There are two basic arguments (three if we indulge the patriotic desire to see pictures of Aussie battlers on notes and coins). First, a separate national currency is required for national monetary policy. National determination of interest-rate adjustments is used by the state for management of the overall level of economic activity within the nation. Currency unification denies this policy lever.
Second, nation-states use their currency for seigniorage. That is, they issue more currency than is required by the current level of economic activity. The benefits of issuing the `extra' currency accrue to state revenue. US dollars circulating as legal tender outside the US were issued by the US state but they do not create inflation within the US because they had to be bought. So their issue generates revenue for the US state. If New Zealand adopts the Australian dollar, seigniorage is lost to the New Zealand state, but the Australian state's capacity expands.
Additionally, seigniorage signals that the state's control of money and the state's control of public revenue and expenditure cannot be separated, and public finance is an intensely political process. With currency union the New Zealand and Australian states would have to reconcile how they raise revenue, where and on what they spend public funds and what their budget strategies would be. There cannot be monetary union without some significant degree of political union.
Note the implications here of the case for US dollarisation -- where there is no political merger with the United States, a substantial range of national economic policy tools is lost in the dollarised countries.
Arguments about dollarisation present the extreme case of the dilemma. There is, for accumulation, a clear logic in having a single global currency. Multiple currencies are as sensible as different rail gauges and different power sockets. But where that global currency is one nation's currency writ large, there is a fundamental contradiction. The US dollar cannot serve as both the global currency and a national currency used to regulate the level of economic activity within the United States. That was the situation that brought down the post-World War II monetary system, the Bretton Woods Agreement. With dollarisation that experience is destined to be repeated.
So the question here is really whether the US dollar could break free from the United States state, and operate as a globally regulated, consensually managed currency. The answer has to be that it is at best improbable, and more realistically unimaginable.
Meanwhile, the reality of integrated accumulation is likely to see more currency unifications stitched up. As mega-currencies get bigger and fewer, exchange rates will assume greater significance, and who controls monetary policy within each currency unit will be a major battle. The difficulty with currency management is not getting everyone to use the same bank notes, but building forums in which `domestic' battles are conducted fairly and without dismissing issues of sovereignty.
Dick Bryan works in Political Economy at the University of Sydney.
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|Title Annotation:||monetary unions|
|Article Type:||Brief Article|
|Date:||Feb 1, 2001|
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