Amid the global financial crisis, Nobel laureate Robert Mundell is calling for the creation of a world currency - anchored by the US dollar and euro with backing from the Chinese yuan - to restore stability to the Bretton Woods level.
He said this would help prevent huge exchange rate instabilities which prompted major debt and financial crises in recent decades.
Then the International Monetary Fund could truly serve as the world’s central bank, he said in a lecture hosted yesterday by the United Nations Economic and Social Commission for Asia and the Pacific (Unescap).
A lecture by the Nobel Economic Laureate on the topic “Global Currency: Dollar, Euro, Renminbi” was part of the ESCAP Distinguished Person Lecture Series.
The Canadian economist, currently a professor at Columbia University in New York, admitted that the plan would require strong support from the United States, the European Union, China and Japan.
The eurodollar exchange rate could be fixed in a wide range of US$1.20$1.40 per euro. The convertibility of the yuan, or renminbi (RMB), probably in four to five years’ time would help, with support from the Japanese yen and British pound. For the yuan to rise, convertibility is necessary. If China wants to turn Shanghai into a world financial hub ranking with New York and London, its currency needs to be convertible.
In a world where 15 currencies are now global currencies, he supports the emergence of the yuan. There is a problem with the euro, but that stems from the fact that the euro zone is not a country. However, China is a country that can cope with currency demand and preserve sovereignty.
“I think it would be good for China, other economies and the world,” he said. “There are 10 things to do to make a currency widely used and independent. The dollar and euro are liquid but the RMB needs to be convertible ... We only need three independent global currencies.”
Having one major global currency is like having a single language for the world. Two official languages, from more than 5,000, would split the world. The rise of the yuan would then help balance the fluctuations, he said.
Despite the bad news surrounding the euro, Mundell sees only a 10 to15percent chance of the euro zone breaking up. To prevent that from happening, the euro zone should reach an agreement on fiscal management, the European Central Bank should approve the budgets of eurozone economies, the plans of the European Financial Stability Fund should be followed through and the ECB should be empowered to act quickly on eurobonds and other issues.
In his presentation, Mundell, regarded as the intellectual father of the euro, fielded questions from Asia-Pacific central bank chiefs, senior government officials, and representatives of the private sector and academic community on policy options before the region as it braces for the likely adverse impact of the eurozone crisis. While acknowledging the seriousness of the sovereign debt troubles, Mundell expressed his confidence that the 13-year old currency will survive.
All the four major financial crises including the savings-and-loan, Asian currency and Lehman Brothers crises, were born from unstable currencies. Under Bretton Woods, when all currencies were pegged to the dollar, there was no such crisis, he noted.
He does not envisage the emergence of an Asian currency area, not because of the problems with the euro but because of the absence of political integration.
“You can’t have a monetary union without a fiscal union. [For Asia], I don’t see a political possibility for it to come about,” he said.
The economist is also of the view that when there was lower demand for a currency, it was vital to let that currency weaken. The economy should also sell foreign assets instead of printing money, which could risk inflation.
“It’s better to devalue before the markets force you to. It’s much cheaper.”