TCS Daily

Mondo Euro?

By Jeremy Slater - January 20, 2004 12:00 AM

Every few years a big surge in the value of one of the major trading currencies sets off a prolonged period of navel gazing by economists and columnists, who are already prone to the practice. The recent rise in the value of the euro against the dollar has led to one such outbreak, and some are calling for a radical solution to the perceived problem. So it is perhaps no surprise that ideas of the Nobel prize winning economist Robert Mundell, the father of the euro, have found support in some quarters.

Last week Professor Mundell was featured in the leading left-wing French daily newspaper Libération, in which he expressed his desire for a global currency platform that would be used for international transactions. The creation of such would not cause the immediate demise of the major currencies, but eventually the dollar, euro and yen would be replaced by a single global currency.

Professor Mundell, who was awarded the Nobel Prize for economics in 1999, is an expert in the field of global currency and his ideas helped lead to the creation for the euro. So naturally his comments could have been portrayed along the lines of 'Father of the Euro Calls for Single Global Currency'. However, apart from the above mentioned interview Mundell's proposal didn't get too much exposure in the European press -- this despite the euro's strength fast approaching the level at which many observers believe it will stifle Europe's fledgling recovery.

Perhaps the reason most financial editors chose not to run with this story is that the euro is already unpopular with many readers and the thought that a global version could replace an EU one is an intellectual and emotional leap too far for the moment. It also may be that despite fluctuations causing accounting and financial headaches for businesses and tourists they are simply accepted as part of the new world economic order.

Some German economic forecasters have pointed out that their national economy seems to be dealing with the euro at its current level and that industrial production grew by 1.3 percent in November, the last month for which statistics are available. Their suggestions are backed by the fact that despite the euro's rapid increase in value in the last year against the dollar it is, over a 20-year historical period, currently priced at its trade-weighted average.

However, not all other eurozone countries have a manufacturing base as large as Germany's and they may be looking for the European Central Bank to bring down interest rates. Or perhaps they're hoping that some massaging of currency market opinion could be possible with comments from central bankers. Other currency watchers hope that next month's meeting of the Group of Seven can also help change the movement in speculation. They believe that a statement made at the end of the last G-7 meeting in September calling for "more flexibility in currency rates" speeded up rather slowed the dollar's fall against the euro. The greenback has slipped by 10 percent in value since then as investors took the comment to mean that the US wanted the dollar to weaken.

Now a lot of the above may look like perfectly good reasons for the creation of a global currency, which would eliminate two of the most disliked professions in the world: central banker and currency dealer. But, more than likely, supporters of the brilliant Professor Mundell would support such an idea purely because they do not like the creative destruction that is part of modern day capitalism.

In many ways it would be good to get away from a world in which currencies float against each other, interest rates fall and rise and the inflation level is not a given, but in doing so we would inevitably become poorer. For it is the relationship among these things that helps create strong growth, high employment and decent levels of investment and consumption. Those that prefer a more social protectionist model dislike these fluctuations in the value of economic components and, despite claiming to want to help the poorest in society, actually condemn them to a world of low employment and few chances to enrich their lives.

No, the time for a global currency has not yet come. But who knows whether we'll be using mondos or globos in 50 years' time?


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