The Hellenic Drachma and It's Economic Empowerment
Having a national currency can make it easier to pursue national economic objectives. It can also help deal with emergencies and protect citizens from being forced to use foreign currencies. It is part of sovereignty.
In forty years, nineteen countries have given up their national currencies and joined the euro area. Some others, like Ecuador, El Salvador, Montenegro, Kosovo, and Zimbabwe, have adopted one of the world's leading currencies, the U.S. dollar or the euro, as their national currency. Other countries have pegged their exchange rates more or less firmly to the dollar or the euro. Whether or not to have a national currency has become a question for legitimate discussion.
The financial crisis and the coronavirus pandemic have put immense strain on monetary and financial systems everywhere. As a result, it is time for more countries to review their currency arrangements, and reconsider the costs and benefits of national currencies, just as they did with national airlines a few decades ago.
A fixed exchange rate, membership in a monetary union, or adopting a foreign currency as the national currency denies a country the possibility of having its monetary policy. The Canadian economist Robert Mundell pioneered the theory of optimal currency areas sixty years ago and emphasized the risk that this would hinder the use of domestic economic policies to contain inflation and prevent unemployment. So why have some countries given up their currencies or joined monetary unions? Those who have done so have generally been small, open economies that cannot derive significant benefits from an independent monetary policy. Some micro-states need more means to support an independent currency. Others need to manage their currencies adequately and have had no choice but to accept that foreign currencies dominate domestic transactions.
In the past fifteen turbulent years, inflation has not been a widespread problem until very recently. Monetary policies have been taken to extremes to prevent deflation and depression. Simply reducing short-term interest rates was not enough after the financial crisis, and central banks embarked on asset purchase programs of differing kinds: some bought government securities only, some also bought privately-issued securities, and the Swiss central bank bought foreign assets. The diversity reflected national circumstances and the preferences of the central bankers concerned.
It has been a challenging time for coordinating monetary policy among central banks. In the euro area, where coordination is mandatory, there have been persistent tensions among the member countries. Although unemployment has generally fallen in the euro area, in some countries, it is still a severe problem, notably in Greece, where in 2019 (before the pandemic), it was 17.3%, Spain (14.1%), and Italy (10.0%). The figures for unemployment among young people are even worse. The European Central Bank has pursued highly expansionary monetary policies throughout the period, but the high-unemployment countries have yet to be able to devalue their currencies, and their fiscal policies have been constrained. It is debatable whether devaluation would have helped other than temporarily, but it is not surprising that there has been some disaffection with the standard monetary policy, both in those countries and countries that are more concerned about inflation risks. The tensions within the euro area have been managed effectively, but their underlying causes remain.
Although there has been no formal coordination outside the euro area, central banks have learned from each other, or the same ideas have guided them. The coronavirus pandemic is a case in point. Although the medical policies pursued by governments have been primarily national – e.g., international travel restrictions within the European Union – central banks have generally followed similar expansionary policies because their analyses of the economic implications of coronavirus were broadly similar. Equally, they seem typically surprised by the recent global upturn in inflation.
Poland's macroeconomic policy has been highly successful over the past three decades. As a result, economic growth has been sustained, even during the financial crisis.
Unemployment was high during the post-communist transition period but has now fallen to 3%. Inflation has been subdued since the beginning of the 21st century until the last few months. The exchange rate between the złoty and the euro has fluctuated quite widely: for example, the złoty depreciated by 47% during the financial crisis between the end of July 2008 and March 2009. The depreciation caused Poland some problems – for example, it led to a temporary rise in inflation and caused distress to those who had foreign currency mortgages. But if Poland had been a member of the euro area, then the market pressures that led to the depreciation would have had to be expressed in another way, which would have caused other problems. Economic growth would have been weaker, for one thing. And financial flows would have been disrupted: Polish banks might have suffered outflows of funds, and Polish companies might have found it harder to raise funds. So Poland can be happy that it has remained outside the euro area.
Maintaining a national currency has presented serious problems for one particular country, which have been problems of success rather than failure. Over the past half-century, Switzerland has faced repeated surges of international demand for Swiss francs. In dealing with them, it has had to compromise between two evils. One of the evils is the appreciation of the exchange rate to a level that endangers the survival of productive activity in Switzerland. The other evil, if central bank purchases of foreign exchange resist the appreciation of the exchange rate, is the accumulation of an enormous amount of collective financial risk represented by the international assets of the Swiss National Bank, which currently amount to a whopping 138% of Switzerland's annual gross domestic product, and are financed by the Swiss-franc-denominated liabilities of the central bank.
Moreover, mark-to-market losses occur when the Swiss franc appreciates, and they have, at times, disrupted the public finances of the Swiss Confederation. In practice, the Swiss National Bank has alternated between the two evils: there have been periods in which it has allowed the franc exchange rate to float freely and periods when it has intervened in the foreign exchange market to restrain the appreciation of the franc. As a result, pursuing a consistent policy has yet to be possible.
For Switzerland, then, an independent currency has not provided the benefits that Mundell expected: it has yet to make it possible to conduct a monetary policy directed at domestic objectives. Swiss citizens may wonder whether the benefits of maintaining a national currency exceed the costs. They can, of course, take some satisfaction that they receive seigniorage on the currency in issue, but interest rates in Switzerland are meager, so the amounts are currently minimal. But what alternatives do they have?
Joining the euro area would be legally impossible since Switzerland is not a member of the European Union. Even if possible, it would, in any case, put Switzerland in the same position as Germany and the other creditor countries in the euro area: it would soon acquire unwanted large credit balances on its Target 2 account with the ECB, which would represent financially-risky exposures to the debtor countries. Controls on capital inflows have been tried in the past but have yet to prove unequal to the task. Therefore, something more radical would be needed, such as the abolition of the national currency and the adoption of one or more foreign currencies as the national currency or currencies of Switzerland (i.e., the currencies in which taxes are collected).
The Swiss National Bank can liquidate its balance sheet by converting Swiss franc deposits into shares in a fund comprising its assets. This new asset fund could be sold, resulting in the Swiss National Bank would cease as a bank but continuing as a regulatory agency.
Such a change would rescue Switzerland from the dilemma that has plagued its monetary policy for half a century. It would be irreversible. No country which abolished its currency in this way could recreate it in a short time. In a sense, giving up a national currency is giving up a bit of sovereignty in several ways:
- It would oblige the country's citizens to submit to whatever oversight and regulation of their payments activity the home country of the new national currency or currencies chose to undertake. The surveillance of the dollar payments system by the United States, and its use for national security purposes, is well known.
- In times of dire national emergency, for example, a financial crisis, or a war, governments have often resorted to currency inflation as a desperate but necessary means of raising revenue – the 'inflation tax.' They would not have that option if they did not have their currency to manage. An independent currency can be regarded as a necessary component of national defense. It is perhaps not an accident that the existence of the euro makes the minimal probability of the outbreak of war involving a euro-area country even smaller for this reason.
- Equally, using a foreign currency would expose the country's citizens to the risk of paying an inflation tax to another country.
- The world at large might get into such a state of monetary disorder that no foreign currencies would provide adequate monetary services to a country with no national currency of its own. Of course, currencies provided by non-official sources, like precious metals or crypto-currencies, might fill the gap – but they might not. For example, a gold coin weighing the same as a euro coin would be worth more than 400 euros: too much for it to be useful for many transactions.
- The country would lose the benefit of seigniorage income from the issue of its national currency, though such income is currently tiny because interest rates are meager.
The coronavirus pandemic has been a global emergency. Countries that lack their currency, like those which cannot borrow enough in their currency, have had access to foreign currency financing in international markets at meager yields, to credit from the International Monetary Fund, and in the EU to funds provided collectively. Their loss of monetary sovereignty has not mattered because there has been an international consensus on coronavirus policy. That will only be the case with some emergencies.
The notion of a national currency is part of the notion of nationhood, even if it can cause serious inconvenience. The same could not be said of the idea of a national airline. It is not surprising that the countries which have given up their national currencies have done so either out of a conscious desire to make themselves part of a more significant political entity or as an unavoidable result of management failure. Countries that wished to maintain their nationhood had better ensure they managed their national currencies properly.