COVER: "GET READY FOR A WORLD CURRENCY" Title of article: Get Ready for the Phoenix Source: Economist;

01/9/88, Vol. 306, pp 9-10 T !"T# $ears from no%, &mericans, 'apanese, Europeans, an( people in man$ ot)er ric) countries, an( some relati*el$ poor ones %ill pro+a+l$ +e pa$in, for t)eir s)oppin, %it) t)e same currenc$. -rices %ill +e .uote( not in (ollars, $en or /-mar0s +ut in, let1s sa$, t)e p)oeni2. T)e p)oeni2 %ill +e fa*oure( +$ companies an( s)oppers +ecause it %ill +e more con*enient t)an to(a$1s national currencies, %)ic) +$ t)en %ill seem a .uaint cause of muc) (isruption to economic life in t)e last t%entiet) centur$. &t t)e +e,innin, of 1988 t)is appears an outlan(is) pre(iction. -roposals for e*entual monetar$ union proliferate( fi*e an( ten $ears a,o, +ut t)e$ )ar(l$ en*isa,e( t)e set+ac0s of 1983. T)e ,o*ernments of t)e +i, economies trie( to mo*e an inc) or t%o to%ar(s a more mana,e( s$stem of e2c)an,e rates - a lo,ical preliminar$, it mi,)t seem, to ra(ical monetar$ reform. 4or lac0 of co-operation in t)eir un(erl$in, economic policies t)e$ +un,le( it )orri+l$, an( pro*o0e( t)e rise in interest rates t)at +rou,)t on t)e stoc0 mar0et cras) of 5cto+er. T)ese e*ents )a*e c)astene( e2c)an,e-rate reformers. T)e mar0et cras) tau,)t t)em t)at t)e pretence of polic$ co-operation can +e %orse t)an not)in,, an( t)at until real co-operation is feasi+le 6i.e., until ,o*ernments surren(er some economic so*erei,nt$7 furt)er attempts to pe, currencies %ill floun(er. 8ut in spite of all t)e trou+le ,o*ernments )a*e in reac)in, an( 6)ar(er still7 stic0in, to international a,reements a+out macroeconomic polic$, t)e con*iction is ,ro%in, t)at e2c)an,e rates cannot +e left to t)emsel*es. "emem+er t)at t)e 9ou*re accor( an( its pre(ecessor, t)e -la:a a,reement of Septem+er 198;, %ere emer,enc$ measures to (eal %it) a crisis of currenc$ insta+ilit$. 8et%een 1983 an( 198; t)e (ollar rose +$ 3<= a,ainst t)e currencies of &merica1s tra(in, partners; since t)en it )as fallen +$ <>=. Suc) c)an,es )a*e s0e%e( t)e pattern of international comparati*e a(*anta,e more (rasticall$ in four $ears t)an un(erl$in, economic forces mi,)t (o in a %)ole ,eneration. !n t)e past fe% (a$s t)e %orl(1s main central +an0s, fearin, anot)er (ollar collapse, )a*e a,ain ?ointl$ inter*ene( in t)e currenc$ mar0ets 6see pa,e 6>7. @ar0etlo*in, ministers suc) as 8ritain1s @r. Ai,el 9a%son )a*e +een con*erte( to t)e cause of e2c)an,e-rate sta+ilit$. 'apanese officials ta0e seriousl$ )e i(ea of E@S-li0e sc)emes for t)e main in(ustrial economies. "e,ar(less of t)e 9ou*re1s em+arrassin, failure, t)e con*iction remains t)at somet)in, must +e (one a+out e2c)an,e rates. Somet)in, %ill +e, almost certainl$ in t)e course of 1988. &n( not lon, after t)e ne2t currenc$ a,reement is si,ne( it %ill ,o t)e same %a$ as t)e last one. !t %ill collapse. Bo*ernments are far from rea($ to su+or(inate t)eir (omestic o+?ecti*es to t)e ,oal of international sta+ilit$. Se*eral more +i, e2c)an,e-rate upsets, a fe% more stoc0mar0et cras)es an( pro+a+l$ a slump or t%o %ill +e nee(e( +efore politicians are %illin, to face s.uarel$ up to t)at c)oice. T)is points to a mu((le( se.uence of emer,enc$ follo%e( +$ a patc)-up follo%e( +$ emer,enc$, stretc)in, out far +e$on( >018 - e2cept for t%o t)in,s. &s time passes, t)e (ama,e cause( +$ currenc$ insta+ilit$ is ,ra(uall$ ,oin, to mount; an( t)e *er$ ten(s t)at %ill ma0e it mount are ma0in, t)e utopia of monetar$ union feasi+le.

The ne or!d e"ono#y T)e +i,,est c)an,e in t)e %orl( econom$ since t)e earl$ 19301s is t)at flo%s of mone$ )a*e replace( tra(e in ,oo(s as t)e force t)at (ri*es e2c)an,e rates. as a result of t)e relentless inte,ration of t)e %orl(1s financial mar0ets, (ifferences in national economic policies can (istur+ interest rates 6or e2pectations of future interest rates7 onl$ sli,)tl$, $et still call fort) )u,e transfers of financial assets from one countr$ to anot)er. T)ese transfers s%amp t)e flo% of tra(e re*enues in t)eir effect on t)e (eman( an( suppl$ for (ifferent currencies, an( )ence in t)eir effect on e2c)an,e rates. &s telecommunications tec)nolo,$ continues to a(*ance, t)ese transactions %ill +e c)eaper an( faster still. Cit) unco-or(inate( economic policies, currencies can ,et onl$ more *olatile. &lon,si(e t)at tren( is anot)er - of e*er-e2pan(in, opportunities for international tra(e. T)is too is t)e ,ift of a(*ancin, tec)nolo,$. 4allin, transport costs %ill ma0e it easier for countries t)ousan(s of miles apart to compete in eac) ot)ers1 mar0ets. T)e la% of one price 6t)at a ,oo( s)oul( cost t)e same e*er$%)ere, once prices are con*erte( into a sin,le currenc$7 %ill increasin,l$ assert itself. -oliticians permittin,, national economies %ill follo% t)eir financial mar0ets - +ecomin, e*er more open to t)e outsi(e %orl(. T)is %ill appl$ to la+our as muc) as to ,oo(s, partl$ t)orou,) mi,ration +ut also t)rou,) tec)nolo,$1s a+ilit$ to separate t)e %or0er form t)e point at %)ic) )e (eli*ers )is la+our. !n(ian computer operators %ill +e processin, Ae% #or0ers1 pa$c)ec0s. !n all t)ese %a$s national economic +oun(aries are slo%l$ (issol*in,. &s t)e tren( continues, t)e appeal of a currenc$ union across at least t)e main in(ustrial countries %ill seem irresisti+le to e*er$+o($ e2cept forei,n-e2c)an,e tra(ers an( ,o*ernments. !n t)e p)oeni2 :one, economic a(?ustment to s)ifts in relati*e prices %oul( )appen smoot)l$ an( automaticall$, rat)er as it (oes to(a$ +et%een (ifferent re,ions %it)in lar,e economies 6a +rief on pa,es 3<-3; e2plains )o%.7 T)e a+sence of all currenc$ ris0 %oul( spur tra(e, in*estment an( emplo$ment. T)e p)oeni2 :one %oul( impose ti,)t constraints on national ,o*ernments. T)ere %oul( +e no suc) t)in,, for instance, as a national monetar$ polic$. T)e %orl( p)oeni2 suppl$ %oul( +e fi2e( +$ a ne% central +an0, (escen(e( per)aps from t)e !@4. T)e %orl( inflation rate - an( )ence, %it)in narro% mar,ins, eac) national inflation rate%oul( +e in its c)ar,e. Eac) countr$ coul( use ta2es an( pu+lic spen(in, to offset temporar$ falls in (eman(, +ut it %oul( )a*e to +orro% rat)er t)an print mone$ to finance its +u(,et (eficit. Cit) no recourse to t)e inflation ta2, ,o*ernments an( t)eir cre(itors %oul( +e force( to ?u(,e t)eir +orro%in, an( len(in, plans more carefull$ t)an t)e$ (o to(a$. T)is means a +i, loss of economic so*erei,nt$, +ut t)e tren(s t)at ma0e t)e p)oeni2 so appealin, are ta0in, t)at so*erei,nt$ a%a$ in an$ case. E*en in a %orl( of more-or-less floatin, e2c)an,e rates, in(i*i(ual ,o*ernments )a*e seen t)eir polic$ in(epen(ence c)ec0e( +$ an unfrien(l$ outsi(e %orl(. &s t)e ne2t centur$ approac)es, t)e natural forces t)at are pus)in, t)e %orl( to%ar(s economic inte,ration %ill offer ,o*ernments a +roa( c)oice. T)e$ can ,o %it) t)e flo%, or t)e$ can +uil( +arrica(es. -reparin, t)e %a$ for t)e p)oeni2 %ill mean fe%er preten(e( a,reements on polic$ an( more real ones. !t %ill mean allo%in, an( t)en acti*el$ promotin, t)e pri*ate-sector use of an international mone$ alon,si(e e2istin, national monies. T)at %oul( let people *ote %it) t)eir %allets for t)e e*entual mo*e to full currenc$ union. T)e p)oeni2 %oul( pro+a+l$ start as a coc0tail of national currencies, ?ust as t)e Special /ra%in, "i,)t is to(a$. !n time, t)ou,), its *alue a,ainst

national currencies %oul( cease to matter, +ecause people %oul( c)oose it for its con*enience an( t)e sta+ilit$ of its purc)asin, po%er. T)e alternati*e - to preser*e polic$ma0in, autonom$- %oul( in*ol*e a ne% proliferation of trul$ (raconian controls on tra(e an( capital flo%s. T)is course offers ,o*ernments a splen(i( time. T)e$ coul( mana,e e2c)an,e-rate mo*ements, (eplo$ monetar$ an( fiscal polic$ %it)out in)i+ition, an( tac0le t)e resultin, +ursts of inflation %it) prices an( incomes polices. !t is a ,ro%t)-cripplin, prospect. -encil in t)e p)oeni2 for aroun( >018, an( %elcome it %)en it comes. Dop$ri,)t of T)e Economist is t)e propert$ of Economist Ae%spaper 9imite( an( its content ma$ not +e copie( or emaile( to multiple sites or poste( to a listser* %it)out t)e cop$ri,)t )ol(er1s e2press %ritten permission. o%e*er, users ma$ print, (o%nloa(, or email articles for in(i*i(ual use.