LOSING CONTROL (27 page)

There is, however, a far more radical option.
It’s indirectly linked to tea or, at least, to the international tea crisis of the eighteenth century and the principle of ‘no taxation without representation’.
A modern-day version might be ‘no monetary decisions without representation’.
Policymakers could collectively choose to do something about the dollar’s dominance in the world’s financial system.

As with so many issues in this book, the tea crisis involved the British East India Company.
The Company had been granted a monopoly on the importation of tea into the UK.
The tea was then auctioned off to wholesalers who could then redistribute the tea to the colonies.
The colonies, meanwhile, were allowed to buy their tea only from the UK.
The arrangement led to excessively high prices for tea, monopoly rents for the East India Company and bumper tax revenues for the British government.

There was, however, a hitch.
The high price of British tea led to an acute problem with smuggling.
Dutch tea was considerably cheaper.
Some of this tea was smuggled to the UK for illicit domestic consumption.
To deal with this problem, the price of tea sold in Britain was lowered, thus reducing both the incentive for smuggling and the
government’s tax take.
The government needed revenue, however, and decided the colonies were a soft target.
The colonists of North America, not surprisingly, were less than enthusiastic about this idea.
They, after all, were supposed to be taxed only locally and not by the government in London.
Their opposition spilled over, alongside crates of tea, with the Boston Tea Party of 1773.
The rest, as they say, is history.

Even if the US isn’t rigging the international financial system in quite the same way as the East India Company and the British government fixed the international tea market in the eighteenth century, other countries are suffering from what I’ll call monetary ‘decisions without representation’.
US monetary decisions reach far and wide for reasons spelt out earlier.
Yet the Federal Reserve has no real duty to worry about the rest of the world.
For a heavily indebted US economy, persistent dollar depreciation is an attractive option.
It imposes a burden on the rest of the world.
Unlike the tea crisis, the burden is carried by America’s creditors, not foreign taxpayers.
The principle, though, is similar.
It is not a good one.

As argued in Chapter 9, we could end up in a world where the dollar is rejected, where nations go their separate ways, where the agenda of globalization is increasingly determined outside the US and where, in the steadfast defence of monetary sovereignty, globalization in all likelihood goes into retreat.
There is, however, another option.

The blueprint for radical reform can be found in Europe.
It’s called the European Central Bank.
Its establishment left individual European nations without domestic monetary sovereignty.
Germany, France, Italy and others in effect pooled their monetary interests together.
This was a logical extension of the European Single Market which, in 1992, had finally put an end to capital controls within the European Union.

The unusual feature of the European Central Bank, at least compared with other central banks, is that it has no fixed geographical jurisdiction.
The Federal Reserve has to worry only about the fifty
American states.
The Bank of England needs to concern itself only with the so-called home nations (if it ever came to pass, Scottish independence would probably lead to the introduction of the euro north of the border, reducing the Bank of England’s responsibilities even further).
The European Central Bank, in contrast, cannot easily tell from one year to the next which countries will fall within its remit.
When the euro was first formed, it wasn’t obvious that, in the years to come, Greece would give up its drachma, Slovenia its tolar, Cyprus its pound, Malta its lira or Slovakia its koruna in favour of the euro.

Widening euro membership presents an interesting antidote to the conflict between a single global capital market and the proliferation of nation states.
In effect, it reduces the monetary sovereignty of nation states while allowing them to maintain sovereignty in other areas, at least to the extent allowable under European Union law.
Importantly, those who join the euro have voting rights on monetary policy.
Unlike other currency arrangements – full-scale dollarizations and the various currency pegs arrangements described in Chapter 5 – membership of the euro gives a country a seat at the policy table.
There is a loss of sovereignty, but it is not a complete loss.
Meanwhile, the trials and tribulations of currency upheavals are, at least in theory, permanently removed.
¹

To date, euro membership is confined to members of the European Union and is contingent on countries meeting specified ‘convergence criteria’.
Like any club, therefore, the euro has a strict membership policy.
That policy, however, could change.
European Union membership could widen further.
The convergence criteria might be relaxed (in the case of Italy and Greece they were not imposed rigorously).
Or, signalling a much bigger revolution, perhaps a time will come when countries not in the European Union may be able to join the euro.

Imagine, for example, that Turkey joins the European Union.
Turkey’s membership would signal, once and for all, that the
European Union was not, as some might claim, a specifically Christian union.
Would Turkish membership begin to change the nature of Europe?
Recognizing this changed nature, would other countries seek to become more closely integrated in the financial aspects of the European project, even if they were geographically detached?
In this very different world, it wouldn’t be so difficult imagining euro membership extending eastwards to Central Asia and to the Levant and southwards to North Africa.
Indeed, such an arrangement would not be unlike the Roman Empire 2,000 years ago, where peoples were connected around the entire Mediterranean Sea.
This time, however, the connections would be on a voluntary basis – an empire of equals, if you like.

If this could happen in Europe and its near neighbours, then perhaps similar developments might eventually occur elsewhere.
It’s unlikely we’ll ever see the Chairman of the Federal Reserve and the Governor of the People’s Bank of China sitting down in the same room deciding on a common monetary policy for the US and China even though, as an economist, I could probably make a good case for regular Sino–US monetary meetings.
Other associations, however, are easier to imagine.
Why not, for example, have a single North American currency extending across Canada, the US and Mexico?
Eventually, this new currency could spread further south, with countries in Central and Southern America also taking part and, in the process, receiving voting rights.
After all, Panama and Ecuador are already ‘dollarized’, but, unlike my suggested new arrangement, they currently have no voting rights over US dollar monetary policy.

The same process, meanwhile, could happen in Asia.
I argued in Chapter 9 that China is already pushing for the renminbi to have a bigger international role.
Why not go one step further and create an Asian monetary union?
Could China and Japan, for example, bury their differences and end up with a common currency?
Might India also want to take part?
If these countries did so, would South Korea
still hang on to its won?
Would the Thai baht, the Philippine peso and the Indonesian rupiah then survive?

Admittedly, many of these ideas are no more than flights of fancy.
²
The euro was created only after many decades of, at times, difficult political integration forced through by the common desire to avoid the conflicts of Europe’s past.
³
The US doesn’t have the same incentives as far as the Americas are concerned.
China and India also have limited incentives from an Asian perspective.
Common currencies would, however, help to remove one of the key asymmetries that, today, make the financial world so unstable, namely, the dominant role in international transactions of the dollar.

At the moment, the US Treasury and Federal Reserve seem to hold all the cards, just as the British government and East India Company did in the late eighteenth century.
This is not sustainable.
Either countries eventually go their separate ways – as happened with the American Revolution – or, instead, they pool together their monetary and financial interests, giving all those involved a seat at the table, subject to the rules of the club.

More can also be done at the domestic level.
In a world of winners and losers, Western governments could spend more time thinking about the redistributional consequences of globalization, particularly through the tax system.
This is not a book about tax reform, but the growing inequalities that have developed over the last thirty years cannot, in my view, easily be explained purely through domestic developments.
If globalization is to continue, a healthy debate over how the losers from globalization should be compensated is surely necessary.
At the moment, there is too much denial, perhaps because politicians think they are impotent to act in the midst of the storm generated by the emerging powerhouses.
Nevertheless, the case for
maximizing growth with no regard for the distribution of that growth is fading fast: the gains are distributed so narrowly that the majority of Americans, British and others are just not benefiting from apparent national economic success.
This, ultimately, is a recipe for conflict and the rise of extremist views.

Domestic reforms are, however, secondary: what matters more than anything else is establishing more stable and sustainable economic relationships between the developed and emerging worlds because, without these, domestic reforms can all too easily turn into protectionism.
Improved international economic relationships require the dollar’s role to be reappraised, either as part of a grand plan or, alternatively, in the light of its growing rejection by the new economic superpowers.

Since the end of the Second World War, the world has moved, inch by inch, towards a system of multilateral arrangements.
Some of these – like the Bretton Woods exchange-rate system – have not survived.
Others – such as the United Nations – have persisted even though their strictures have often been ignored.
The icing on the cake for multilateralism was, arguably, the fall of the Berlin Wall.
The collapse in Soviet communism created freedoms for many countries which had previously been under the Soviet yoke.
Some of these countries joined the European Union.
Others joined NATO.
Some joined both.
Russia itself joined the G7, turning it into the G8.
And, as we saw at the end of Chapter 2, the G8 is being supplanted by the G20.

These events, however, can equally be described in very different terms.
The widening of NATO membership to Central and Eastern Europe is construed by Russia as an attack on its sphere of influence.
Discussions about possible membership for Georgia or the Ukraine naturally create anxiety in Moscow (in much the same way that Cuba’s
willingness to become a base for Russian missiles created anguish in Washington in 1962).
As Sir Christopher Meyer, the former British ambassador to Washington, notes, ‘The fall of the Soviet Union did not wipe the slate clean.
The Russia that we are dealing with today, with its fear of encirclement, its suspicion of foreigners and natural appetite for autocracy, is as old as the hills, long pre-dating communism.
It is a Russia that will never be reassured by the West’s protestations of pacific intent as it pushes Nato and the EU ever eastwards.’
⁴
Put another way, the fall of Soviet communism has reopened imperial rivalries and led to the re-emergence of ethnic and religious strains which, for so many decades, had lain dormant.
The 1990s conflict in former Yugoslavia underscores this conclusion all too clearly.

China, also, has reason to be suspicious about the new ‘multilateral’ world.
At first sight, China has fewer reasons to worry about organizations such as NATO.
However, NATO’s operations take place in many different parts of the world.
Its active involvement in Afghanistan has an obvious explanation but is, nevertheless, odd from a geographical perspective: on the last occasion I looked at a map, Kabul was a long way from the North Atlantic.
Moreover, in the 1995
Study on Enlargement
, NATO established the following conditions for new members: