A once ignored solution to the age old quandary of monetary union

By James Clark

The culmination of the much fabled Bretton Woods Conference of 1944 resulted in the brave claim that a system of monetary union, positioned unshakeably upon the benevolent foundation of US hegemony, had established the conditions for everlasting economic stability.

What the Conference had however failed to adopt was one of none other than John Maynard Keynes’ seemingly more abstract suggestions. Keynes had spotted and presented both weakness and solution within and as part of the proposed Monetary System during the conference of 1944. As was often the case Keynes was fatefully proven to once again be ahead of the curve when the Bretton Woods system bent and creaked to its final collapse decades after his passing in the early 1970s’s, the sorrowful moment in which the world’s most equitable period of economic expansion drew to a close.

The proposal he made and the issues he spotted bear no less relevance to the issues surrounding currency union to this day, albeit arguably even more acutely so in the tight knit monetary union of the Eurozone. Keynes had argued that structural trade and fiscal imbalance between the nations involved would inevitably lead to the chronic dysfunction or indeed disintegration of any monetary union, a breakdown that could occur at any moment and from the most insubstantial of causes.

Out of such discrepancy came the suggestion of a system of International Currency Union. From this one might glean that the Currency Union of the Eurozone would have thus evaded the aforementioned concerns, this though would be a wholly incorrect conclusion. For despite the presence of Monetary Union on the one hand, the Eurozone faces an absolute polarisation of fiscal and trade balance on the other.

Significant benefits of currency union are of course undoubtedly present. Businesses for example find it far easier to plan contracts and suchlike shielded from the vicissitudes of speculation. Increased volumes of trade are thus made possible through a common currency.

The significant downside however is the extent to which surpluses and deficits are allowed to balloon as the previous economic fundamentals which shifted and that were present prior to monetary union are removed. For example, those of lower productivity would face strong downward pressure on their exchange rates, and upward pressure upon their borrowing costs. The dual effect being boosted competiveness, and restraints upon fiscal expansion respectively. Without these boosts and brakes the effect, as we have quite clearly seen, has been a complete of escalation of both trade and fiscal deficit alike and the inevitable growth of sovereign debt to follow.

High levels of sovereign debt however, primarily in this case owed overseas, only truly becomes a chronic issue in so much as when the prosperous, surplus yielding nations within the economic region (and their creditors) get the jitters. In essence the pumping of surplus finance and goods into peripheral states can no longer continue and all of a sudden the debt accrued through years becomes somewhat of an issue, as it sits both exorbitant and unable to be serviced.

What has thus been seen, both in the breakdown of Bretton Woods and the continued state of crisis within the Eurozone is that the precarious position of “balanced imbalance” can only be sustained so long as the surplus powerhouse of the region remains infallible. For when this fails to be the case, the ill effects inevitably impact hardest on those “lowest” in economic status; in this instance being those with large and chronic dual deficits, which in turn puts the entire agreement under inexorable threat.

To prevent such situation from occurring Keynes had proposed a tax on those nations running a surplus which would then fund a 0% borrowing facility for those running deficits. Although this may sound “unfair” it must be remembered that Economic Union is exactly that, of which the ultimate aim should be equitable economic development bar none. Not that it is likely that the politically powerful surplus nations are likely to see it this way. Be that as it may the presence of such an “overdraft” facility would enable those running structural deficits to make up for their inability to depreciate their currency, and to be able to avoid the vast failures of contractionary economics in a time of economic turmoil and recession.

What Keynes suggested, that chronic imbalance can undermine and even counterbalance the benefits of monetary union, is therefore as applicable today as it is likely to ever be. Contrary to popular rhetoric a surplus remains to be the equal menace of a deficit within the context of a system such as the Eurozone. Movement towards trade and fiscal balance thus presents itself as an opportunity to break from the shackles of the depressionary economics that dogs Europe, it is likely however that this opportunity will unfortunately once again be cast aside, and the problems of European Economic Integration will remain unsolved.

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