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ENA 2011 workshop on Eurozone crisis. Franco Carminati. Why the existing euro?. Miguel : «  China has proposed to create a managed floating exchange rate regime”, why not for the euro.

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why the existing euro
Why the existing euro?
  • Miguel : « China has proposed to create a managed floating exchange rate regime”, why not for the euro.
  • Miguel : “US demands flexible yuan, independent central bank and opening of capital account (China will not accept)”, why has “EU” accepted?
  • ECB : Cancelled capacity to create money. CB interest rate and of FX rate “independent” from politicians, but dependant from whom?
a exit scenario
A/ « Exit » scenario
  • One or several countries decide to reintroduce domestic currencies and leave the eurozone
  • What will follow is very uncertain and  depends crucially on :

- The splitting country’s ability to tame the adverse  effects of the exit decision discussion point

- The behavior of other countries of the eurozone :

* Will other countries leave the eurozone ?

* Will other countries & markets retaliate ? Political will and EU project

exit scenario
« Exit » scenario
  • Copy paste here the Dominique’s chart in blue color
exit scenario dominique s chart
« Exit » scenario – Dominique’s chart

Comments on Dominique’s chart:

  • Some consequences are based on « market laws» such as:

* Higher interest rates

* Bank runs, capital flows, crisis of national banking system

  • Debt in exterior currency would increase: this is actually part of the debt negociation process.
  • Higher (impoted) inflation derived from devaluation does not mean reduced competitiveness.
exit scenario1
« Exit » scenario
  • Benefits to be expected :

– Recovery of domestic monetary sovereignty

– Ability of the country to devaluate its currency

  • Costs of exit strategy :

– A high risk of monetary & financial crisis see comments

– High economic and social costs to be clarified and compared with prevailing situation

- € less to loose some importance on International level?

- Risk of non coopertaive policies (competitive devaluations,…)

  • The balance between costs & benefits will depend crucially on the country’s ability to  implement radical changes in its policies :

– Capital control, price control, control of banks, …

– Long term investment in the productive sector …

b common currency scenario
B/ « Common currency » scenario
  • Countries of the eurozone agree :

– to abandon the euro as a single currency

– to adopt a common currency going along with domestic currencies

  • This new monetary regime would require :

– to go beyond the previous system of the ECU

– to draw on Keynes’ model of the « bancor » by :

* Creating new institutions, i.e. a regional Clearing Union

* Adopting new rules for monetary cooperation, fiscal discipline why?, limits on current account disequilibria, …

common currency scenario
« Common currency » scenario
  • The new ECU would be a regional equivalent of  SDRs and have three functions :

– Unit of account

– Complementary means of payment

– Intrument of credit among States

  • The new ECU would be equivalent to the Latin  American SUCRE
  • These new regional monetary systems would lead to a transformation of the international monetary system

– based on regionalisation

– with new rules & institutions (regional monetary fund)

common currency scenario1
« Common currency » scenario
  • Benefits from a common currency :

– Domestic monetary sovereignty => more flexibility for  economic policies

– Regional cooperation based on symmetrical relationships among country members

  • Costs & risks :

– High transition risks when going from the single currency system to the common currency system see discussion on leaving the €

– Important reforms needed : will Germany accept ? Democracy problem

– Risks of currency war & speculation if the cooperation is not working is cooperation working now?: what rules for fixing exchange rates between the new ECU and the domestic currencies ? There are ways

– The new ECU is not a full‐fledged money : only a basket of  domestic currencies; will circulate mainly among governments and central banks better than actual situation. And why not using it with, for instance, electronic tools?

c new monetary union scenario
C/ « New monetary union » scenario
  • The euro remains the single currency of the  eurozone
  • Radical reforms are implemented :

– Political union is reinforced to foster :

* cooperation among country members

* democratic control on EU policies by elected bodies and civil  society

– European fiscal policies are developed with a large European budget (10% of EU GDP) & European taxation & financial transfers within the eurozone, targeting trade balances?

– A drastic change in monetary policy and in the role of the ECB :

* Democratic control instead of independence of ECB

* Coordination of monetary policy & fiscal policiy instead of  separation

* priority to employment, social and ecological targets =>  financing of public long term investment by money creation

new monetary union scenario
« New monetary union » scenario
  • Benefits

– The euro will become a powerful factor of integration and cooperation if the reforms are implemented =>  the risk of segmentation of Europe is reduced

– No risk of monetary instability among country  members (no currency war, no speculation)

– The euro as a means to counter‐balance the power of  the dollar & yuan in the world economy

  • Costs & risks

– High political cost for national governments (nationalist political parties)

– The euro can benefit to all country members only if  neoliberal policies are given up

- what chances does this scenarion really have within reasonnable delay?

points of agreements
Points of agreements

Conditions for a single currency:

  • Mundell conditions, hence the following
  • Same currency would mean similar inflation and similar interest rates. (Different inflation in the US, but more mobility).

Conditions of area government in each currency level + Internatioanl:

  • Lending for productive investment, own housing, etc… but not for speculation purposes.
  • Democratic institutions to control all aspects of monetary policies : exchange rates, capital flows, money creation, central bank rates.
  • Democratic institutions to coordinate tax and social issues, trade balance.
  • Convergence criteria 3%/60% should not be imperative
  • Capital flow controls between zones with different currencies
  • SDR instead of $ as international currency
  • Actual governance not to be confused with government
  • Debt auditing to possibly cancel illegitimate parts
discussion points
Discussion points
  • What would be today IMZ in Europe?
  • MU first to trigger economic convergence, or economic convergence first? Is there a political will?
  • Single €, common €, national currencies? Define the EU project!
  • What room for local currencies?
  • Is 2% inflation target adequate?
  • Which strategy? (Menacing) to withdraw?
  • Conditions for leaving the EZ: reimburse same figures but in devaluated money (which one way to restructure debt)?
  • Is European bonds a sufficient target?
aknowledgements
Aknowledgements
  • Miguel and Dominique
  • Lapavitsas, Lordon, and others….