Globalization creating a 'deadly brew' for national currencies
Barrie McKenna
Tuesday, July 17, 2007
WASHINGTON — Hardly a day goes by that someone, somewhere isn't griping about currencies.
In Ontario, embattled Ontario manufacturers rail about the suddenly airborne loonie. Members of the U.S. Congress want to bash China for fiddling with the yuan. And ordinary Argentines would rather hold just about any currency than their own.
So maybe it's time to rethink the whole idea of national currencies. That, at least, is the provocative thesis of Benn Steil, director of international economics at the Council on Foreign Relations in New York.
In an article in Foreign Affairs magazine, Mr. Steil suggests that scores of countries - from the Americas and Asia to Europe and the Middle East - should simply give up on their own currencies and embrace one of the world's global currencies, such as the euro or the U.S. dollar.
With the gold standard gone, marginal currencies simply can't survive against the sheer weight of globalization. Inflation and high interest rates are a constant threat.
"National currencies and global markets simply do not mix," Mr. Steil argued. "Together they make a deadly brew of currency crises and geopolitical tension and create ready pretexts for damaging protectionism."
Get rid of monetary nationalism, along with unloved currencies, and you'll rid the system of a major source of instability, he concluded.
Mr. Steil points to Europe in the developed world and Ecuador (which uses the U.S. dollar) in the developing world as shining examples of why fewer currencies are a good thing.
"Europeans used to say that being a country required having a national airline, a stock exchange, and a currency," he wrote. "Today, no European country is any worse off without them. Even grumpy Italy has benefited enormously from the lower interest rates and permanent end to lira speculation."
China, he suggested, would do well to give up the yuan in favour of a "pan-Asian" currency that would rival the euro and the dollar, while allowing the country to liberalize its financial and capital markets.
Just about every other country would be better off with the dollar or the euro as they gradually integrate into global financial markets.
Even better, he suggested, would be a new gold-based international monetary system, backed by private gold banks, rather than governments.
Where does that leave a country such as Canada? Its economy is puny compared with the United States or Europe, and the bulk of its trade is with its southern neighbour.
That can be a problem when the currency swings. The loonie's recent surge (past 95 cents U.S.) is nice if you're vacationing in Maine this summer. But it's pretty devastating if you're making auto parts and other manufactured goods for the U.S. market.
The rest of the Canadian economy - oil, most other commodities and the service sector - are humming along fine. The net result is an economy that appears much stronger than the United States' (3.5-per-cent annualized first-quarter growth vs. 0.7 per cent in the U.S.). But pockets of the manufacturing heartland in Ontario and Quebec are hurting badly.
Wouldn't it be nice to have it both ways - stability for exporters and an end to currency swings.
Mr. Steil seems to think so. In an interview, he said Canada isn't like Brazil or Turkey, where the threat of a currency crisis is ever present.
"Canada can certainly sustain a national currency, because Canadians, as well as foreigners, treat the currency as a reliable store of wealth," he said. "Canada is at no significant risk of a currency crisis."
But that doesn't mean Canada couldn't do better. Mr. Steil argued that the "economic arguments" for Canada-U.S. monetary integration are compelling.
The main impediments, he suggested, are political, not economic.
And that's part of the problem. The United States, and more specifically, the U.S. Federal Reserve Board, has become a reluctant central bank for the world. Its interest rate decisions affect borrowing costs and investment yields everywhere.
As long as the United States acts responsibly, keeping inflation low and steady, the rest of the world will be okay.
But if you suspect Fed chairman Ben Bernanke is drinking and driving at the wheel of the global economy, you might want to stock up on some gold.
bmckenna@globeandmail.com
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