Hegemonic currencies during the crisis: The dollar versus the euro in a Cartalist perspective

ABSTRACT

This paper suggests that the dollar is not threatened as the hegemonic international currency, and that most analysts are incapable of understanding the resilience of the dollar, not only because they ignore the theories of monetary hegemonic stability or what, more recently, has been termed the geography of money, but also as a result of an incomplete understanding of what a monetary hegemon does. The paper argues that the dominant view on the international position of the dollar has been based on a Metallist view of money. In the alternative Cartalist view of money, the hegemon is not required to maintain credible macroeconomic policies (i.e., fiscally contractionary policies to maintain the value of the currency), but to provide an asset free of the risk of default. Further, it is argued that the current crisis in Europe shows why the euro is not a real contender for hegemony in the near future.

KEYWORDS:

• Dollar
• euro
• international currency

ACKNOWLEDGEMENTS

Preliminary versions of the paper were presented at the Allied Social Sciences Association (ASSA) meetings in Denver, 6 January 2011, and the Heterodox Economics Student Association (HESA) seminar series at the University of Utah, 11 March 2011, and at the Eastern Economic Association meetings in Boston, 11 March 2012. The authors would like to thank to Greg Hannsgen and participants of the seminars for their comments, without implicating them. Also, we would like to thank Linda Goldberg, of the Federal Reserve Bank of New York (FRBNY), for sharing her data on international trade invoicing.

Notes

1. An important difference between Cohen's approach and the hegemonic stability theory is that he allows for more than one currency as dominant reserve asset at a given historical period.

2. Ruggie (1982: 390) is explicit on the importance of the role of the means of exchange (vehicle currency) in shaping monetary hegemony. For him, in the case of Great Britain: ‘in the domain of monetary policy it was the role of the sterling as the major vehicle currency, held by foreign business, banks, and even central banks, that gave the Bank of England the influence to shape international monetary conditions'.

3. Helleiner (1994) and Vernengo (2001) show that the collapse of Bretton Woods is to a great extent the result of international pressures in the United States, particularly by financial groups linked to Wall Street, for a more open financial order, that allows greater capital mobility.

4. In fact, according to Eichengreen (2011: 162): ‘the plausible scenario for a dollar crash is not one in which confidence collapses in the whims of investors or as the result of a geopolitical dispute but rather because of problems with America's own economic policies. The danger here is budget deficits out of control'. Note that Eichengreen believes that the dollar will remain a key reserve currency alongside the euro, and perhaps other international currencies.

5. A similar position on what she termed the return of American hegemony was developed independently by Tavares (1985). For a discussion of her contribution see Vernengo (2006a).

6. This is nowhere more evident than in the contrast between the United States and Europe. While in the latter the fiscal adjustment is demanded by markets and enforced by the European Central Bank (ECB) and the International Monetary Fund (IMF), in the United States it is entirely a domestic political discussion, which has more to do with the internal politics of whether the welfare model of the New Deal will be maintained, and funded by taxing whom. For the American austerity plans see Crotty (2011).

7. The market economy, it is argued, is conducted on the basis that individuals exchange commodities solely on the condition that each individual possesses (and offers) something that is immediately wanted by another.

8. Eichengreen and Flandreau (2009) show that the pound's hegemonic position fluctuated, losing its reserve position in the 1920s, then partially recovering it in the 1930s, being finally displaced by the dollar in the post-war period. In their view, the dollar and the pound can be said to have shared the international reserve position during the inter-war period, which shows that there might be more than one key reserve currency at a given point in time. The emphasis is on the reserve and vehicle roles rather than the unit of account of money.

9. This view of money is compatible with the views of the classical authors and Marx, or what has been referred to as the surplus approach. For a discussion of the classical and Marxist views of money see Green (1992).

10. Marx (1859–61: 239) argued that: ‘the special difficulty in grasping money in its fully developed character as money…is that a social relation, a definite relation between individuals, here appears as a metal, a stone, as a purely physical, external thing which can be found, as such, in nature, and which is indistinguishable in form from its natural existence'. In fact, the difficulty of grasping the nature of money was greater in a period in which international money was directly or indirectly tied to gold. After the closing of the gold window in 1971, the social nature of money should have been more evident. For a discussion of money as a social relation see also Ingham (2004).

11. In fact, Helleiner (2003) shows that beyond the control of monetary policy for domestic reasons, the access to fiscal resources was one of the motives behind the creation of territorial or national currencies in the nineteenth century.

12. For alternative inflation theories see Vernengo (2006b).

13. Note that the principles of functional finance do not extend to debt in a foreign currency. For a discussion of functional finance see Berglund and Vernengo (2006).

14. Serrano (2003) refers to the post-Bretton Woods system as the flexible dollar standard, while Vernengo (2006c) argues that the system may be described as a latu sensu dollarization, i.e., not the specific use of the dollar by a country (dollarization strictu sensu), but by the whole world economy, i.e., a system in which the dollar is de facto a global fiat money.

15. In this sense, the global imbalances, in particular the large American current account deficits that reflect the so-called ‘exorbitant privilege', are instrumental for the functioning of the world economy. However, it is important to note that the fact that countries in the periphery have benefitted from the flexible dollar standard does not imply that it is adequate to suggest that the system is akin to Bretton Woods (Dooley et al., 2003). In fact, during the actual Bretton Woods period global imbalances were limited by the dollar-gold connection. A similar view of global imbalances to the one here presented can be found in Kregel (2010).

16. Note that imbalances were solved during Bretton Woods, and to a great extent still are, by changes in the level of activity rather than changes in the exchange rate (Kregel, 2010).

17. Before 1999 the euro reserves are represented by the sum of German marks, French francs and Dutch guilders.

18. Several authors have criticized the problems in European macroeconomic conduct, in particular, the decentralization of fiscal management (see Arestis and Sawyer, 2006; Sardoni and Wray, 2006).

19. The Maastricht accord involves the technical prohibition of the financing of public deficits by the ECB (Article 21.1 of the ECB statute).

20. In May 2010 the EU created the European Financial Stabilization Fund to bailout financially distressed countries in the region, but still required severe fiscal adjustment in exchange for funding.

21. European economic policy lacks the necessary effective fiscal policy coordination conducive to the structural needs of the different European economies that constituted the European Monetary Union (EMU). In fact, loss of policy autonomy on the part of national governments was promoted a positive development by those in favor of the EMU model of monetary integration (Pivetti, 1993). The Stability and Growth Pact (SGP) has become a rigid fiscal rule that generates counterproductive procyclical policies (see Panico, 2010). For evidence on the negative effects of fiscal austerity on tax revenues and on fiscal balances, see UNCTAD (2011).

22. It is interesting to note that the ratio of debt/GDP for Greece moved from 100.3 in 1999 to 95.6 as of 2007, owing to a significant rise in GDP. Greek authorities did not, in fact, let public finances deteriorate (even if the official numbers may be disputed), as many in the mainstream argue, and fiscal deficits were not the straw that broke the camels' back in the unfolding European debt crisis (Panico, 2010). Current account imbalances associated to higher Unit Labor Costs vis-à-vis Germany are to blame.

23. If the US ever decided to repay its foreign liabilities through persistent current account surpluses, this would require a strong dollar depreciation, which would, by implication, depreciate the real value of US debt through the related increase in its price level. This, in turn, would reflect a slow-down in the growth of exports from the rest of the world to the US (Schulmeister, 2000). Given the predominance of export-led growth for many economies in the periphery, semi-periphery, and even at the core, dominant economic agents in the world economy are not necessarily keen on seeing dollar hegemony progressively vanish. See on this Vasudevan (2009).

24. For a discussion of conventional (Monetarist/Metallist) and alternative views of inflation see Vernengo (2006b). In this sense, it should be clear that Cartalism is compatible with heterodox Keynesian views of the functioning of the economy.

25. This suggests that bonds are not priced according to risk, and risk does not depended on austerity. In fact, the European crisis would not have happened. Note that most European countries (e.g., Spain) had surpluses before the crisis and still do have small amounts of debt. See Pérez and Vernengo (2012).

26. Note that Eichengreen (2011) believes that money is fundamentally a useful means of exchange, and that fiscal responsibility is central for building up credibility in a particular currency. Also, Eichengreen argues that Hume's specie-flow adjustment of the balance of payments is the main mechanism to understand the adjustment of external accounts. All of these are hallmarks of a Metallist view of money.