The Political Economy of the Eurodollar...

Were the introduction of a single currency for Europe and the United States a purely economic concern, a Eurodollar and a supranational Global Reserve Bank probably would have been introduced long ago, because the economic benefits of a single currency exceed the costs.

Even if economics and history provide convincing arguments for the introduction of a single currency for the United States and Europe, or for the rest of the world, political factors have been and will continue to be the primary barrier to the introduction of a single currency. This section will focus on the political problems of establishing a currency union, and of establishing a supranational Global Reserve Bank to oversee the currency union. Many people already believe that central banks, which are independent but accountable to their governments, have too much power already, and ceding power to a supranational central bank would increase the central bank's power even more. In order for governments to be willing to cede this power, they must believe that the benefits of a single currency will exceed the costs.

The process of introducing a single currency has been difficult enough in Europe, which has carried out multinational cooperation for decades. Getting the United States and Europe to agree on a single currency will be even more difficult. The United States was one of the last developed countries to have a central bank, and only in the past few years has the United States allowed nationwide banking, something which has been taken for granted in every other country in the world for most of this century. The United States' willingness to participate in international economic organizations is evidenced by its membership in the WTO, the IMF, the World Bank and NAFTA.

The primary political reason for opposing a supranational Central Bank would be the loss of economic sovereignty that would occur. However, it is important to differentiate between independence, accountability, and political control. Even though it would be a supranational agency, the Global Reserve Bank would never have complete independence from domestic political control. It would be accountable to the countries that would give the GRB its power. If the Global Reserve Bank forsook its accountability and acted against the interests of the United States, the US could leave the currency union just as some French African countries have left the CFA Franc currency union. The threat of exit would force the GRB to remain accountable.

The basis of democracy is a system of checks and balances, which limits the powers of each branch of government. Although members of the Federal Reserve have a large degree of freedom from political influence, Congress must approve Federal Reserve appointees, and the appointees are subject to impeachment. Similar control over appointees to the Global Reserve Bank would be necessary for the U.S. Congress to approve US membership. The Global Reserve Bank can be both independent and accountable. The two are not mutually exclusive.

In some ways, it would be easier to establish an independent, supranational Central Bank than to establish other supranational agencies. First, by definition, the Federal Reserve is supposed to be independent of political influence on a day-to-day basis. Second, because the Federal Reserve makes a profit from the reserves that are deposited with it by banks, it does not require any Federal funding. Third, the Federal Reserve has coordinated its actions with other central banks in the past. The Global Reserve Bank would institutionalize this cooperation. Fourth, by their very nature, financial markets are international, and the dollar is an international currency with about half of U.S. currency currently outside of the United States. A Global Reserve Bank would probably make policy coordination between the world's central banks easier than it is today.

A final economic cost of the currency union would be that the United States would no longer be able to issue bonds in its own currency. Given the credit history of the United States, there would be few worries about default through non-payment, and the introduction of a Eurodollar could reduce the risk to bond holders because the government could no longer default through inflation.

One way of understanding the future debate over the Eurodollar will be to look at which interest groups will come out in favor of a currency union and which will oppose the currency union. In the case of a Eurodollar currency union, direct losers would be few. Although there might be ideological opposition, economic opposition would come mainly from firms that would fear that the currency union would favor large multinationals at their expense.

The introduction of a Eurodollar would also have political repercussion outside of the United. Many European countries found it difficult to convince their citizens to give up their own domestic currency for one controlled by the European Central Bank. Convincing Europeans to give up their currency for one jointly controlled by Europeans and Americans might be even more difficult. Outside of Europe, the introduction of the single currency would produce a group of insiders who were part of the world's leading currency, and outsiders who were not. The world could become divided between Eurodollar countries and everyone else. For this reason, arrangements would have to be made for countries outside of Europe and North America to join the Eurodollar bloc.

Once the transition to a single currency for Europe and the United States was made, the transition to a single currency for the entire world could come with a speed that might surprise many. The world might easily moving from having almost 200 currencies today to having one within a decade, and twenty-five years from now, historians would wonder why it took so long to eliminate the Babel of currencies which existed in the twentieth century.

The fear that economic integration inevitably leads to greater political integration is unfounded. In fact, the opposite is probably true. Economic unity can coexist with and support political diversity. Countries which have been part of the Deutsche Mark bloc (Denmark, Netherlands, Belgium, Luxembourg, France, Switzerland, Austria) have seen no reduction in political freedom as a result of linking their currency to the Mark. In some ways, having a currency union could enhance political sovereignty since it would reduce the role of monetary policy in politics.

One benefit of a currency union between the United States and Europe would be that it could strengthen the Euro. Many Europeans fear that the Euro could fail, but if the Euro were seen as an intermediate step on the path to a currency union between the United States and Europe, many reservations about the Euro could be removed.

Greater financial and economic integration within the world could also reduce the likelihood of conflict between countries. With a single currency being used throughout the world, and multinational corporations operating in dozens or even a hundred different countries, the potential for war due to economic reasons would be reduced substantially. This fact has been a driving force behind the economic integration of Europe since World War II.

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