IT IS ALMOST a truism to say that euro membership worsened the Greek crisis. The thinking goes that because Greece does not have its own currency, it could not increase competitiveness and boost growth through devaluation.
Although devaluation is a valuable instrument, I think most countries and companies would benefit if the world, not just Europe, used a single currency.
Today’s fragmented financial world is unfair. On the one hand, there’s Denmark with such a glut of currency, local and foreign, that its central bank’s key deposit rate is minus 0.75 percent.
Then there’s Greece, which has had to limit withdrawals from ATMs to e60 (R815) a day because of a severe cash crunch.
Consider the case of Apple, which had about $160 billion (R2 trillion) in March last year and made $1.795bn in interest and dividend income that year – which is less than 1 percent, considering Apple kept increasing the cash holding. There are countries that would kill to be financed at that rate – but are forced to accept much higher ones, and not always because they are unsafe, but because they are often dragged down by risk perceptions that have little to do with reality.
Before the 2008 financial crisis, financial globalisation was on the rise, partly because investors underestimated risk.
After the mortgage crash, it became clear that rating agencies were not much help and that local and specialised knowledge was needed to make smart decisions. The EU debt crisis only confirmed this. Cross-border investment fell off sharply.
Generally, the fiscal regimes, political and macroeconomic risks of countries vary so much that mistakes happen, even with detailed and knowledgeable analysis.
Reducing risk
To ensure that financial resources are distributed more evenly across the world, it would make sense to cut down country-specific risk. Taking monetary policy out of individual countries’ hands would go a long way toward that goal. Currency risk would be eliminated. There would always be coups, corruption, fraud and mismanagement to throw the best models off kilter. Yet there would be less to worry about.
Now, the world’s 140 or so currencies sometimes make cross-border flows dangerous. The ability to devalue is nice, but it’s illusory, to a large extent. It helps balance a budget, bring down debt and make exports competitive, but it hits citizens with high inflation. If the world used the same currency, the problems inadvertently caused by the euro wouldn’t be replicated.
Of course, there would be the question of who should administer the global central bank. This is where something like Bitcoin could come in handy: a decentralised system that works with little human intervention and that regulates itself.
This is naive utopianism, of course. The obstacles to this are huge. But this pipe dream shows how tough and complex the euro project is. Those who write it off as a failure don’t show it enough respect. Sure, there have been setbacks but its participants are accumulating data that may one day allow us to figure out how to bring the whole world closer together. – Bloomberg