“Cen­tral banks’ le­git­i­macy mat­ters most when the stakes are high­est. Ev­ery­day mon­e­tary-pol­icy de­ci­sions are, to put it mildly, un­likely to ex­cite the pas­sions of the masses”

Financial Mirror (Cyprus) - - FRONT PAGE -

Tech­nol­ogy is now reach­ing the point where a com­mon dig­i­tal cur­rency, en­abled by near-univer­sal mo­bile phone adop­tion, cer­tainly makes this pos­si­ble. And how­ever far­fetched a global cur­rency may sound, re­call that be­fore World War I, ditch­ing the gold stan­dard seemed equally im­plau­si­ble.

The cur­rent sys­tem is both risky and in­ef­fi­cient. Dif­fer­ent monies are not only a nui­sance for tourists who ar­rive home with pock­ets full of un­spend­able for­eign coins. Global firms waste time and re­sources on largely fu­tile ef­forts to hedge cur­rency risk (ben­e­fit­ing only the banks that act as mid­dle­men).

The ben­e­fits of rid­ding the world of na­tional cur­ren­cies would be enor­mous. In one fell swoop, the risk of cur­rency wars, and the harm they can in­flict on the world econ­omy, would be elim­i­nated. Pric­ing would be more trans­par­ent, and con­sumers could spot anom­alies (from their phones) and shop for the best deals. And, by elim­i­nat­ing for­eign-ex­change trans­ac­tions and hedg­ing costs, a sin­gle cur­rency would rein­vig­o­rate stalled world trade and im­prove the ef­fi­ciency of global cap­i­tal al­lo­ca­tion.

In short, the cur­rent state of af­fairs is the by-prod­uct of the su­per­seded era of the na­tion-state. Glob­al­i­sa­tion has shrunk the di­men­sions of the world econ­omy, and the time for a world cen­tral bank has ar­rived.

Dream on. A sin­gle world cur­rency is in fact nei­ther likely nor de­sir­able.

Cen­tral banks, while ideally in­de­pen­dent from po­lit­i­cal in­flu­ence, are nonethe­less ac­count­able to the body politic. They owe their le­git­i­macy to the po­lit­i­cal process that cre­ated them, rooted in the will of the cit­i­zenry they were es­tab­lished to serve (and from which they de­rive their author­ity).

The history of cen­tral bank­ing, though com­par­a­tively brief, sug­gests that demo­crat­i­cally de­rived le­git­i­macy is pos­si­ble only at the level of the na­tion-state. At the supra­na­tional level, le­git­i­macy re­mains highly ques­tion­able, as the ex­pe­ri­ence of the eu­ro­zone am­ply demon­strates. Only if the Euro­pean Union’s sovereignty eclipses, by demo­cratic choice, that of the na­tion-states that com­prise it will the Euro­pean Cen­tral Bank have the le­git­i­macy it re­quires to re­main the eu­ro­zone’s sole mon­e­tary author­ity.

But the same po­lit­i­cal le­git­i­macy can­not be imag­ined for any transat­lantic or trans-Pa­cific mon­e­tary author­ity, much less a global one. Treaties be­tween coun­tries can har­monise rules gov­ern­ing commerce and other ar­eas. But they can­not trans­fer sovereignty over an institution as pow­er­ful as a cen­tral bank or a sym­bol as com­pelling as pa­per money.

Cen­tral banks’ le­git­i­macy mat­ters most when the stakes are high­est. Ev­ery­day mon­e­tary-pol­icy de­ci­sions are, to put it mildly, un­likely to ex­cite the pas­sions of the masses. The same can­not be said of the less fre­quent need (one hopes) for the mon­e­tary author­ity to act as lender of last re­sort to com­mer­cial banks and even to the gov­ern­ment. As we have wit­nessed in re­cent years, such in­ter­ven­tions can be the dif­fer­ence be­tween fi­nan­cial chaos and col­lapse and mere re­trench­ment and re­ces­sion. And only cen­tral banks, with their abil­ity to cre­ate freely their own li­a­bil­i­ties, can play this role.

Yet the tough de­ci­sions that cen­tral banks must make in such cir­cum­stances – pre­vent­ing desta­bil­is­ing runs ver­sus en­cour­ag­ing moral haz­ard – are si­mul­ta­ne­ously tech­no­cratic

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