Academic journal article The Cato Journal

The Uselessness of Monetary Sovereignty

Academic journal article The Cato Journal

The Uselessness of Monetary Sovereignty

Article excerpt

The very politicians and economists who repudiate Keynesian policy at home become fervent Keynesians when they contemplate the horrors of British membership of the single currency.

--Robert Skidelsky

Before addressing the question of whether Britain should keep sterling, we should examine what little we know about the nature of money and about the functions and capacities of the nation state. Though it may be true that changing one's monetary standard has deep implications for national sovereignty, one should first give some thought to the reduced role of money and to the limits of state power in a modern open economy. There could be a need for recasting the arguments both for and against adopting the euro.

Thus, as regards the ability to influence the real economy with monetary instruments, the friends of the euro predict that economic convergence brought about by the single currency will help the European Central Bank govern the European economy with a continentwide monetary policy; and the friends of sterling hold it that it will be much easier to control economic fluctuations by means of the Bank of England interest rate. Thus also, as regards the consequences of globalization on national states, the defenders of the European Monetary Union hold it that the nation state is obsolete and impotent, while the defenders of national sovereignty, especially in Denmark and Sweden, fear the discipline of the euro for its effect on the welfare state. But views may change in more ways than one after seeing the limited effects of all monetary policy on real economies in a globalized world, be it applied by the ECB or the Bank of England. And the same may happen to one's political hopes for Europe or Britain after realizing that the nation state is enfeebled, not so much by its small size, as by the excessive span of its functions.

It is my contention that the notion of sovereignty is stretched and misapplied as regards the economic and political consequences, both favorable and unfavorable, of adopting the new European currency. It is as if both camps started from an unspoken Keynesian assumption that monetary and political authorities can exercise discretionary influence on society if their territories are of the requisite size.

For Keynes, the capitalist system could not function properly without continuous intervention by politicians and civil servants; and what is more, elected and unelected officials could be trusted to work for the public good. The defenders of the euro, pointing at the fact that national currencies are too small for an independent macroeconomic policy and ruing the time when national central bankers enjoyed monopoly powers, extol the advantages of a single European central bank, able to pursue monetary stability while governments can carry out active macroeconomic and welfare policies. Many critics of the euro also want an active monetary and social policy but think it possible only within a sovereign national state.

Now, what if

* a successful anti-cyclical policy is not within the reach of a central bank;

* central banks cannot directly and permanently contribute to full employment by expanding the money supply or reducing interest rates in the money market;

* central banks turn out to be unable to change the real interest rate on long-term credit;

* the real rate of exchange cannot be managed discretionally;

* the welfare state should turn out to be unsustainable whatever the size, national or continental, of the area over which it obtains?

Then a whole family of economic and political arguments for and against the euro lose relevance.

One may ask those in favor of the euro why they want to impose a new currency if people will increasingly be able to choose whatever money suits them best. Equally one may say to those wishing to retain monetary sovereignty that there is little point in wanting to control monetary policy, or wield the instrument of the bank interest rate, or intervene in foreign exchange markets, as economies become increasingly globalized. …

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