GAM Holdings CEO: Is it possible to unify the global currency?

Author Larry Hatheway (Chief Economist, GAM Holdings) Alexander Friedman (CEO, GAM Holdings)

The world is more economically and financially integrated today than at any time since the second half of the 19th century. But it is no longer appropriate for decision-making, especially central bank decision-making, to be done at the national level and with national concerns in mind. Isn't it time to rethink the global monetary system?

Is a unified global currency possible?

The world is more economically and financially integrated today than at any time since the second half of the 19th century. But decision-making—particularly central bank decision -making—is still done at the national level and with national concerns in mind, which is no longer appropriate. Isn’t it time to rethink the global monetary (non-)system? In particular, doesn’t a single global central bank and a single world currency make more sense than our confusing, inefficient, and long-outdated hodgepodge of national monetary policies and currencies?

Technology has advanced to the point where almost everyone has a mobile phone, making a common digital currency a distinct possibility. However far-fetched the idea of ​​a global currency may be, it was equally irrational to break with the gold standard before World War I.

The current system is risky and inefficient. Different currencies are a nuisance for travelers, who always come home with fistfuls of foreign coins they can’t spend. Global businesses also waste time and resources on currency risk hedging that is largely useless (and only enriches the banks that act as intermediaries).

Getting rid of national currencies would bring huge benefits to the world. The risk of currency wars and the impact they would have on the world economy would suddenly disappear. Pricing would be more transparent, and consumers would be able to detect anomalies (through their mobile phones) and get the best deals. In addition, a single currency would eliminate foreign exchange trading and hedging costs, which would revitalize stagnant world trade and improve the efficiency of global capital allocation.

In short, the status quo is a byproduct of the outdated era of the nation-state. Globalization has reduced the dimensions of the global economy, and the age of the world’s central bank has arrived.

Dreaming. A single world currency is neither possible nor desirable.

Ideally, central banks should be independent of political influence, but they should still be accountable to the people as a whole. Their legitimacy comes from the political process that created them, rooted in the will of the citizens they are supposed to serve (and who derive their authority from).

The history of central banks is relatively simple, but it also shows that democratically mandated legitimacy is only possible at the level of the nation-state. At the supranational level, legitimacy is still very problematic, as the experience of the eurozone amply demonstrates. Only if the sovereignty of the European Union overrides the sovereignty of the nation-states that make up the European Union through democratic choice, will the ECB have the legitimacy needed to become the sole monetary authority of the eurozone.

It is inconceivable that a transatlantic or transpacific monetary authority, let alone a global one, would have the same political legitimacy. Treaties between nations can coordinate the rules governing commerce and other areas. But they cannot cede sovereignty to an authority like a central bank or a coercive symbol like paper money.

Central bank legitimacy matters most where the stakes are highest. Day-to-day monetary policy decisions are, to put it mildly, of little interest to the masses. But the same cannot be said for the (hopefully) less frequent need for monetary authorities to act as lenders of last resort to commercial banks or even governments. As we have seen in recent years, these interventions can mean the difference between financial chaos and collapse, between mere austerity and recession. And only central banks, with their ability to freely create their own liabilities, can shoulder that responsibility.

But the difficult decisions central banks need to make in these situations—between preventing destructive runs and encouraging moral hazard—are both technical and political. Most importantly, the legitimacy of their decisions is rooted in law, which itself is an expression of the democratic will. Bail out this bank but not that one? Buy sovereign debt but not the debt of states and overseas territories (such as Puerto Rico)? While deciding such questions at the supranational level is not theoretically impossible, it is unlikely to be done in the current era. Legitimacy, not technology, is the currency of central banks.

But the fact that a single global central bank and currency will fail miserably (no matter how strong the economic case for it), does not mean that policymakers do not have a responsibility to address the challenges posed by a fragmented global monetary system. That means strengthening global multilateral institutions.

The International Monetary Fund's (IMF ) role as the arbiter of sound macroeconomic policies and protector against competitive currency devaluations should be strengthened. Finance ministries and central banks in large economies should make a joint commitment to let exchange rates be determined by the market. In addition, as Reserve Bank of India Governor Raghuram Rajan recently noted, the IMF should support emerging economies that may face liquidity crises as the United States normalizes monetary policy.

Similarly, a more globalized world requires a commitment from all actors to improve infrastructure to ensure the efficient flow of resources throughout the world economy. In this regard, the World Bank should increase the capital base of its Turkey Reconstruction and Development Bank by the requested $253 billion to help emerging economies finance highways, airports, and other infrastructure.

Multilateral support for infrastructure investment is not the only way to revive global trade under current monetary arrangements. We have amply demonstrated over the past seven decades that reducing tariffs and non-tariff barriers can also work – most importantly in agriculture and services, as envisioned by the Doha Round.

Global financial stability can also be strengthened within the current framework. All that is needed is coordinated, transparent, and well-understood rules and supervision.

For today’s international monetary system, perfection—the unattainable single global central bank and currency—should not be the enemy of good. Committing to existing approaches can certainly improve our policy tools and boost global growth and prosperity.

(About the author: Project Syndicate is known as the "world's most intelligent column". Its authors are top economists, Nobel Prize winners, and political leaders. Topics include the views of global political, economic, scientific, and cultural shapers. It provides readers around the world with the world's most high-end original articles and the most in-depth comments to help them interpret the "changing world".)