Currencies across the generations
Currencies across the generations
Currently the dollar is the world's currency (the only true international and reserve currency), although there are widespread doubts about whether it can retain this status and, if not, what will replace it. This lecture uses economic history – looking backward across the generations – to shed light on the prospects, risks and implications.
and today i have the pleasure of introducing a speaker usually i don't make a compliment but i can say for sure that barry eichengreen is certainly one of the greatest experts of currency worldwide and i have learned that as a journalist i'm really happy that there's a large audience today barry eichengreen teachers at berkeley university in california is the author of many books one of these has not been translated in italian as yet but you can find a cockpit outside it's called exorbitant privilege it's a book on the future of currency the future of dollar but uh i think is the greatest expert of europe in the united states and understanding each other from the two sides of the ocean is not easy as a professional journalist i realized that even the best american economists very often are not really full experts of how the euro works and i think is going to talk about that too today he will uh briefly describe the main problems that currencies have now worldwide he's really an expert but he also is an expert of many other things and he can put all this information together very effectively americans tend to be highly specialized on a particular field whereas mr eichengren is an expert of many so he can talk about the problem occurrences in the context of our crisis and in the uh context of economic history and he's also an expert to be italian economic history was was one of the speakers at the conference organized last year by parker italia on the italian the history of italian economy on the 150th anniversary of unification and with two italian economists delivered a presentation on the history of the lira exchange rate and its impact on our economy but there's another reason why i'm very happy to have barry eisengren here today and that is that his family has deep roots in europe his mother lucille and by the way he uh i also brought here another book on it his mother wrote some books on her experience uh after uh being brought to bergen-belsen and auschwitz it's the history of women in extermination camps it's the third book actually written by lucille nikon green reporting this dreadful experience of her now i don't want to take more of your time and give the floor directly to mr i can green thank you stefano thank you for that um that very nice and also um touching uh introduction you should have mentioned perhaps that my mother's book is translated into italian um you uh you described a number of the reasons why i am not so widely respected in the united states among economists i'm inadequately specialized um i do uh historical work and which is somewhat unfashionable among economists in the united states and i'm a believer in the european project i continue to think that the euro will survive which is very much a minority opinion in the us but we will uh we will return to that um it is uh really a pleasure for an economist it's a kind of a unique experience to be in trento for the festival of economics a number of my berkeley colleagues from george akerloff to gerard rolla have told me about what a nice experience they had here my talk inevitably is somewhat different than many of the others at the festival i will be talking about currencies and their use across the generations and how the situation facing future generations will be different from that facing current ones and i will be talking about international currencies in particular so when i say international currencies people in this room will undoubtedly think about this one this is uh a currency that is used in what at latest count is it is it 17 or 18 european countries but they would be wrong the right currency to think about uh in the international context is of course this one so the first point that i want to emphasize is the remarkable extent to which our 21st century global economy still is dollar based it still depends to uh striking extent on the dollar to finance international transactions of all kinds so let me give you a couple of statistical reminders uh of that fact of the extent to which we still live in uh on not only only people like me in the united states but all of us still live in a dollar-based world the dollar is still involved in 85 of all foreign exchange transactions worldwide this according to the latest tri-annual survey conducted by the central bankers bank the bank for international settlements the dollar still accounts for fully sixty percent of all of the foreign currency reserves held by central banks and governments around the world its use in invoicing and financing uh trade related commodity trade transactions far exceeds countries trade with the united states the dollar still accounts for nearly half of all international debt securities issued and traded worldwide and it's the the dominant fund funding currency in other words it's the dot it's the unit that commercial banks even in europe borrow when they want finance when they want to fund uh investments of all kinds so what what really do i mean analytically when i when i'm talking about uh international currency status the previous statistics have already implicitly given you the answer i'm talking about a currency that's widely used to settle trade related transactions it's widely used as a vehicle or a currency of denomination for private international investment and it's widely held as reserves uh by central banks and governments so there is a a conventional wisdom about why the dollar remains so dominant even today at a point in time when the united states accounts for less than a quarter of the world economy number one the dollar has incumbency on its side uh inertia in the use of international currencies is strong in other words element two of this conventional wisdom is there is room in the world economy for only one true international currency just like there's room in in the market for consumer electronics for only one dominant operating system or so it was long said you can begin to anticipate where i'm heading put these two observations together and they suggest that the dollar will uh remain the dominant international currency uh for future generation set like it is for the current one so what i want to do by by way of starting is is to challenge that uh conventional wisdom number one uh to use some historical evidence to show that inertia in the international use of currencies is not in fact uh that strong the situation has and can change very quickly i will use some historical evidence to show that the natural monopoly argument that there is room in the global market for only one true dominant international currency is similarly rejected by the historical evidence that multiple international currencies have in fact co-existed at a point in time and that that this has occurred rather frequently put these observations together and and one can suggest i will suggest that future generations uh will will have a a choice of international currencies that multiple international currencies will coexist and i will i will leave the punch line uh which global uh currencies for the second half of the talk if you will so what is the conventional historical wisdom people who write about this subject tend to invoke the relevant history invoke economic history without really looking at it very carefully when they invoke it they invoke it in order to make the the following in order to advance the following stylized facts my dissertation advisor having told me that for an economic historian those two words are uh constitute an oxymoron stylized facts number one the pound sterling was the dominant and essentially the only true global currency in the 19th century and right up to 1945 uh through world war ii and even for a brief period thereafter this despite the fact that the united states had already overtaken great britain as the world's largest economy around 1870 as the world's largest exporter around 1914 and as the world's largest foreign investor uh by 1920 and then the dollar supposedly took over the mantle as the dominant international currency only after 1945 only as a result of the uh the shock of world war ii and it has remained such ever since so i want to suggest that this historical wisdom is wrong uh uh making that suggestion uh requires doing uh uh a little bit of historical homework in order to try to establish how long the shadow of history in fact is so this kind kind of uh empirical work requires one actually to uh go back to the archives which is what uh we have done i'm talking about myself and a series of collaborators and that historical evidence suggests that the conventional wisdom is wrong in each and every respect so the conventional wisdom is wrong about the composition of international reserves before 1945 why did no one know this because no one went through through the admittedly hard work to find out what the facts were so over a period of some years i won't tell you how many we politicked with um archivists in central banks in particular who were loath to reveal this highly sensitive 80-year-old financial information except when when uh the governors of the relevant central banks uh at our behest picked up the phone and called up the arc archivist who then did and finally reveal the information so red here is the dollar blue is the pound sterling the year is 1929 and you can see that already by the end of the 1920s the dollar had become more important than the pound sterling as uh the form in which central banks held their international reserves the crossover point turns out to be about 1923 1924. you can look at trade finance uh the instrument that um uh exporters and importers uh used to obtain credit for uh to finance their international transactions have the name trade acceptances you can compare their importance um uh in in new york and in london in the 1920s and again you see the same thing that the dollar had in this case modestly it's the solid line here overtaken the pound sterling um in the 1920s the dollar had not been used to finance imports and exports at all before 1914 not even the imports and exports of the united states because u.s banks were prohibited before the federal reserve act in 1914 from going abroad they had no foreign contacts when a u.s coffee merchant wanted to import coffee beans from brazil he asked his bank to go to that his new york bank's correspondent bank in london to get the trade credit to pay the brazilian coffee bean exporter who then shipped the beans to the us this changed very rapidly with the creation of the federal reserve act the creation of a market and trade acceptances in new york in the 1920s and again the same thing is true of the dollar and the pound sterling as vehicles for foreign investment so here we look uh at the currency of denomination of foreign bonds bonds issued by governments on foreign markets to try to sell them to foreign investors during and after world war one and you can see that very quickly after world war one the dollar the red line leaps up to the point where where uh the dollar is as important as the pound sterling as uh currency of denomination for as a vehicle for foreign investment so what have we learned the three dimensions of international currency experience all point in the same direction number one international currency status can be gained very quickly it was gained by the dollar from a standing start where it wasn't used internationally at all in a period of 10 years it can also be lost very quickly as we see from the experience of the pound sterling again that's contrary to the conventional wisdom which says use of the dollar is pretty much locked in and international use of the dollar is pretty much locked in and the united states can take it for granted number two multiple international currencies can coexist they did coexist after world war one and if you look a little bit more carefully at the at the data for the period before world war one you find that while the pound sterling was the leading international currency it wasn't the only one if you look at the currency composition of the reserves held by central banks for example about half of them were in british pounds but a quarter of them were in french francs and a quarter of them were in in german mark so so it's the same picture of multiple international currencies the second half of the 20th century when when the dollar was so dominant when only the united states had liquid financial markets open to the rest of the world and therefore when the dollar was the only true international currency the second half of the 20th century is the aberrant exceptional period not the prototype of what we should expect so what does this imply seems to me it implies that the dollar could potentially lose its international currency status quite quickly if the united states doesn't get its act together uh and and i will try to be a little bit more precise about what about that technical economic term getting its act together means and even if it does there's good reason to think that eventually the dollar will nonetheless that it will still have to share the international state so um i've given you the um the conventional wisdom about dollar dominance past present and future but there is also talk about the end of dollar dominance people have been arguing that the dollar as the the leading international currency is in some sense on its last legs that the era of dollar hegemony is drawn to a close on what grounds do they argue this i i think essentially four or five number one because uh the united states is no longer so dominant economically using dollars in uh in italy in japan all over the world made perfect sense after world war ii when the united states accounted for half of the industrial production and trade of the free world it makes considerably less sense today when the u.s is only depending on how you measure it 20 or so of the global economy secondly the united states no longer possesses uh a financial monopoly um as i asserted a moment ago for nearly half a century after world war ii the united states was the only country with deep and liquid financial markets open freely open to international investors it made perfect sense that they would come to new york for credit and they would finance their international transactions using dollars this really only changed in europe and japan at the end of the 1980s and and beginning of the 1990s when europe for example finally removed its residual capital controls but now we have a a variety of economies with increasingly deep increasingly liquid financial markets open to international investors the us no longer possesses a financial monopoly from this point of view number three because the network effects to which i alluded briefly before are weaker than they were in the past once upon a time it made perfect sense for uh everyone to use dollars because everybody else used dollars you priced your exports and dollars because everybody else priced their exports in dollars because doing otherwise made it hard for customers to compare the price of your product with the prices of the competition it made it harder for aspiring exporters to break into uh new markets there was room for only one standard you measure a value measure of prices in international markets and that standard was the dollar which is what gay gave the dollar its first mover advantage and and tended to lock in its use over time as as i hinted before until recently we heard exactly the same argument uh for example operating systems for consumer electronics you had to use windows because all the other students you knew or all the other professors on on your corridor used windows and doing anything else created compatibility problems that made it hard to exchange data and uh and work efficiently so windows was the first mover windows got locked in windows would be the only operating system available to us because of these network effects forever so we we know that's not true anymore of the the market for consumer electronics that those guys have learned over time how to build open standards open systems to and reduce interchangeability costs and i think the same is increasingly true in financial markets once upon a time it was hard to compare prices denominated in international currencies you had to go down and and buy la stampa in order to find out what that price had been yesterday or you had to call your broker to get a guess of what it was today um now of course everybody carries in their pocket a device called a smartphone with which you can compare currency values in real time so this idea that you have to use the same unit in your international transactions that everybody else uses i think no longer holds water fourth and most importantly in my view because u.s fiscal capacity is less the global economy needs a supply of safe assets to be held as reserves by central banks and international investors something that the international monetary fund emphasized in this report last month we we call that liquidity and global markets need liquidity for many years that liquidity those safe assets have taken the form of u.s treasury bonds uh the market in u.s treasury bonds is the single largest financial market in the world uh it is standardized it is unsurpassed in liquidity it is backstopped by the fed um it's backed by the full faith and credit of the us government such as that is um but as the world economy expands our ability to provide the in the ability of the united states to provide these safe and liquid assets on the scale required by an expanding global economy becomes less and less and the us treasury's capacity to backstop an adequate supply of these safe assets is cast into doubt there will have to be other sources the question is what they will be and and finally because the us economy faces uh significant challenges the first challenge is whether we can continue to grow so yesterday we learned that the us economy grew by only revised figures 1.9 in the first quarter of 2012 and we know it is not going to do as well for the remainder of the year a lot of that earlier growth was inventory restocking which is over levels of household indebtedness uh are still high graph on the right they've come down a little bit relative to disposable income but not much so firms are not going to be building inventories it's arguable that consumers will not be spending where will the growth come from it will not come from the public sector because uh public sector stimulus will be withdrawn from the u.s economy going forward rather than being added the question is how dramatically it will be withdrawn will there be the so-called fiscal cliff at the end of the year when the bush tax cuts expire the payroll tax cut expires the extension of unemployment insurance benefits expire the so-called sequester rate is applied where public spending declines uh as well all that could be a a very large decline in public sector spending at a time when the private sector is still being very cautious it makes me worry about 2013. so i'm i'm worried about 2013 i would rather see the uh the government smooth that adjustment over a period of years i'm not totally in denial about the medium-term fiscal challenges that the united states faces indeed looking forward some years i'm quite worried about them there is no political consensus on the united states about how to meet them and no willingness to compromise everybody in the united states understands perfectly well what needs to be done to solve the fiscal problem it's very simple the answer has three elements we need expenditure restraint we need more revenues and we need to deal with what may be uh going forward the explosive growth of health care costs but there's no consensus about uh uh in what proportions uh the the uh to what extent the solution should come from those three sources so when i'm in the us i feel compelled to show this picture i i suppose i don't have to show it here part of the solution in the united states we're actually having this discussion very actively at the moment in california where there will be a ballot proposition to about raising taxes part of the solution in the united states will will have to be more revenues we raise less revenue public sector revenue this is all levels of government than any other civilized country aside perhaps from from australia we're going to have to deal with that problem as well so lots of challenges in the united states i think all that said and despite the country's problems uh the dollar remains for the moment the only true global currency but the point i made before about how this cannot remain the case forever i think still stands uh the united states cannot does not have the capacity to pump out safe assets on the scale required by an expanding global economy the rest of the world will grow more quickly than the us emerging markets will continue to emerge the process of convergence of successful low-income countries toward our higher income standards will continue so there will have to be alternative sources of safe assets bringing me now to the question of what alternatives so um the the book that stefano alluded to went off to the publisher like a year and a half ago two years ago and i have a little bit of writer's remorse here like many people i would have been a little bit more cautious about the euro had i known then what i know now but i'm prepared more or less to stick by my guns here i think europe's challenge is really very simple it's all about the banks i was happy to hear mario draghi yesterday say it's all about the banks i was happy to hear uh mr amazon from amusement from the german finance ministries yesterday say it's all about the banks i think ignacio bisco said it's all about the banks and it and and it is europe it's the solution to the euro crisis is really very simple there is a vicious spiral connecting sovereign debt problems with banking problems in europe where they feed on one another in a destructive way that vicious spiral has to be stopped or broken and there is a second vicious spiral between the contracting economy in europe and and the banking crisis where the two elements feed on one another again and that vicious spiral has to be broken also so i think this audience will be familiar with these two problems um the sovereign debt banking crisis vicious spiral is that banks uh because they have their arms twisted in various ways load up on sovereign debt then there are sovereign debt problems uh resulting in credit downgrades that lead to losses not all immediately realized for the banks but then somebody has to come along and and fill the hole in the bank's balance sheet recapitalize them that in the end can only be governments and that in turn worsens at the outlook for the for government debt which worsens the condition of the banks which worsens the condition of the government finances without end unless something is done to break this vicious spiral the ecb some people would said tried to break this vicious spiral starting in december with its ltro with its liquidity operations but all those did were to buy some time for another solution to be found as we now realize and they had the perverse effect of letting the banks get some liquidity from the ecb and use it to load up on high yielding debt of their own governments so that only reinforced the first problem that i described to you before the second vicious spiral is is again i think uh obvious to economists that's the one connecting recession with banking problems recession makes for non more non-performing loans it makes for more defaults on construction projects and residential mortgages bad loans weaken bank balance sheets which makes the banks more reluctant to lend but as they become reluctant to lend the problem of recession grows deeper creating more losses for the banks again in a a vicious interaction without end and and this one has operated powerfully in europe especially in the last year uh as the the bank's balance sheets are weak the banks stop lending this used to be called deleveraging a term which some people put a positive spin on now it's called credit crunch because people appreciate the impact on the economy and the problem of credit crunch has been aggravated by some rather perverse responses on the part of policymakers who have for example sought to encourage the banks to um raise their uh improve their capitalization improve their own reserves by selling assets which only makes the problem for the real economy even worse so people are worried we now don't yet have the the bank run problem in europe but as we learned again in spain yesterday we have the bank trot problem where the speed at which people are removing their deposits from the banks in in many southern european countries has increased from the bank walk to the bank jog to the bank trot and you know what comes though those who the bank canter problem people who who do horseback riding in in their spare time know know what comes next their the the banks can only fund themselves get the funds they need to operate by turning to their national central banks which turn to the european central bank giving rise to this target two problem that everybody talks about so that's the euro crisis in a nutshell um and if you agree with that diagnosis i think the implication for policy follows directly bank recapitalization done right is the single most important thing europe can do to halt the operation of these vicious spirals and stabilize its finances and its economy that will require transparency about what the situation in the banks is too bad i note parenthetically that last week the spanish government decided not to hire blackrock um to audit the spanish banks because blackrock is well known to be pretty firm about these things uh recapitalizing the bank's right will require real money not just uh 4 billion euros or 13 billion euros are now 19 billion euros for for bankia but more it will require not just 60 billion euros for the spanish banking system not just 75 billion euros for the banking your spanish banking system but more and the spanish government to focus on the case du jour doesn't have the fiscal resources to do this turning to the imf to get them doesn't help because that just increases the debt of the spanish government the imf has to be repaid and subordinates the spanish government's other creditors so the money will have to come from the european stability mechanism it will have to come it will have to be an obligation joint and several of the european union as a whole read germany and and and i think that ultimately will happen so there are a lot of things this brief discussion of the crisis in uh in the euro hasn't talked about it hasn't talked about the problem of fiscal consolidation hasn't worked the more consolidation you've done the worse your economic performance i could talk about that more but it's pretty clear here there hasn't been much rebalancing within the euro zone you don't have to be a phd economist to know that if southern europe is going to export more somebody else has to import more northern europe if southern europe is going to spend more somebody else southern europe is going to spend less somebody else has to spend more read northern europe there is a little bit of that adjustment beginning now but like everything else aside from the incipient bank run like everything else in in europe the adjustment is painfully slow so economists know what to do about these other aspects uh as well northern european countries with fiscal space should use it southern european countries not only spain but others should be given more time to do the fiscal consolidation that needs to be done less front loaded austerity when the economy is weak wetted together with more back-loaded austerity when the economy can support it a little bit of additional european investment bank spending for infrastructure projects wouldn't be a bad thing but it's purely cosmetic on the scale currently being discussed and until those other measures uh are put in place which will require time uh the european central bank is going to have to provide more support for for economic growth there's that little problem of of greece after june 17th which i i haven't mentioned but i think keeping greece in the eurozone is desirable we can talk about that but it will only happen with a very different approach to the greek problem than has been seen to date carrots rather than sticks for the greek people who've done a tremendous amount of adjustment given where they started from and uh more aid for greece not more debt for greece which is the only thing that the troika has provided so far so we're hearing rumors to this effect now but the problem is that um i i think of the euro crisis as a car on a race track on an icy race track whose two wheels are spinning at different speeds so the crisis wheel speeds spins very fast and the policy response wheel spins slowly and we know what happens to the stability of a car when the two drive wheels spin at different speeds that's where europe is at the moment so i do think that ecb hasn't done enough that's what this slide which i don't have time for says i do think the ecb will do more rather sooner than later through a variety of mechanisms both directly and indirectly if the european stability mechanism the bailout fund that comes into full operation on july 1st gets a banking license and the ecb can lend to it as will almost certainly happen as well so my worry is that whatever the outcome of the election in greece on june 17th is it will not be the last election in greece nothing will be changed by the june election nothing will be changed if new democracy and and its left center party get a working majority for the moment the recession will deepen unemployment will rise further if nothing else is done if europe sticks to plan a and there will be a a another dissolution of the government and another election and more support for extremist parties in this even more dreadful economic uh environment so i would submit that the a plan b is needed not only at the european level but in terms of europe's uh approach to greece i'm cautiously optimistic i continue to hope against hope that this will happen um the big fact working against political extremism you you know this in italy is elsewhere is there's much more generous support for the unemployed now than there was say in the 1930s governments and societies now will be reluctant to jeopardize the european project when the gold standard collapsed in the nineteen thirties that's the analogy everybody uses in this context there was no equivalent globalization had already collapsed tariff barriers had already been thrown up so there was no equivalent of the european project to or or the single market to jeopardize so all that makes me hope that um europe has still has a chance of holding its monetary project together and that the euro will not ultimately go the way of the gold standard longer term institutional reform fiscal union euro bonds all that i think they will they will come this halfway house is not feasible it's an engine for instability europe will either have to go backward or go forward everybody understands that now and i continue to hope against hope i continue to bet by by making presentations like this one that ultimately it will go forward but fiscal union and euro bonds are a multi-year project europe is not going to get there tomorrow the one thing it can do between today and tomorrow is banking union it can give the european banking authority which already exists real authority over national regulators it can create a common deposit insurance fund funded by contributions by banks across europe it can have a single resolution procedure for the big 33 banks in europe there are some delicate issues here like a lot of those big banks are british is the uk going to be in us in the banking union or out of the banking union like it's out of the monetary union and where exactly will the funding come from and in what proportions i think we'll find out the answers to those questions not in a period of years but in a period of weeks let me finally talk for a few minutes about the third runner in this competition the chinese one here the story is somewhat happier although it's not quite as happy this week as it was last week or the week before the one is not used for international transactions very much yet but the chinese are intent on changing that they understand that american banks and firms have an advantage in being able to do cross-border business using dollars and they want chinese banks and firms to have the same competitive uh advantage moreover they see internationalizing the wan as a strategy for freeing china from its own dependence on the dollar chinese officials the ones i talked to are convinced that china will have that asia will have a single currency just like europe has a single currency but in asia the single currency will be the one and they have a a careful sequence strategy for achieving that first encourage wider use of the wand for trade related transactions they're doing that big time second cautiously use its water use for private financial transactions they're beginning to do that third and finally encourage central banks to use it more broadly and that's beginning to happen as well but there are obvious challenges here facing the chinese as they seek to elevate their currency to international status china has underdeveloped financial markets its bond markets are only about a tenth as big as those of the united states its financial markets are not liquid many of those bonds are held to maturity by banks and credit cooperatives in china itself bank deposits are unattractive because the banks are basically an arm of government so foreigners are reluctant to hold deposits on shore financial liberalization may lead to capital outflows capital flight from china rather than flows into china that appears to be happening right now to a greater extent than seen previously as people worry about an abrupt slowdown of the chinese economy and people are worried about uh the security of their foreign investments there has never been a true international currency except one that has been issued by a democratic state the united states great britain the republic of the netherlands before that china would be the first and the fact that it's not a democracy makes certain foreign investors wonder about whether the checks and balances that make a currency attractive a as a a vehicle and a store of value would would apply in the chinese case so i have some stuff here that we can come back to maybe i'll skip in the interest of time is a chinese slowdown coming yes is it likely to be abrupt no but nobody from the outside really knows for for certain um how abrupt it's going to be so how do i view the exchange rate picture overall i think the previous preceding suggests that the dollar will probably remain a strong performer for the balance of 2012. the kind of phrase people use nowadays is it's the least unattractive contestant at the beauty pageant it's the least dirty shirt in the pile the euro will be weak because the european central bank will be catching up to the fed and its zero interest rates the chinese won will probably be weak as well if the chinese economy continues to weaken and the chinese authorities use the exchange rate to try to boost their exports so this is the last question i want to ask before opening things up what happens if europe fails to draw a line under its crisis and the euro doesn't step up to international currency status what happens if the chinese are not successful at internationalizing their currency over the course of the last decade the world will have no choice then but to continue to rely on dollars for international liquidity as a result of which international liquidity will grow scarce and indeed in the worst of all worlds where peop investors lose confidence in the dollar before uh alternatives have time to emerge uh international liquidity will grow very scarce indeed what happens then trade credit will become hard to obtain cross-border lending and borrowing will become more costly and difficult central banks unable to find an attractive form in which to hold their reserves would tighten controls on cross-border transactions because they won't have the reserves with which to intervene in markets when markets do unexpected things in other words 21st century globalization would be placed at risk i think at considerable cost to the younger generation in this room that is exactly what happened in the 1930s in the 1930s there were two international currencies as as i've described the pound sterling in the dollar in 1931 there was first a sterling crisis and then a dollar crisis by the end of that year central banks had liquidated more than half of their foreign exchange reserves they all attempted to flee into gold but there was only so much gold to go around uh they raised interest rates in a deferred effort to attract it in a period when the global economy was weak and higher interest rates were the last thing it needed so the result was a deflationary crisis international lending collapsed international trade collapsed the first era of globalization which ended on approximately september 21st 1931 came to an abrupt close and the result was deflation and and financial distress the things that made the great depression so great so i conclude that this is a scenario to be avoided at all costs much better would be a scenario in which the dollar remains a trusted and reliable source of liquidity until which time maybe 10 years from now as alternatives emerge after all that's how long it took for an alternative to emerge after 1914 the dollar ascended to international currency status in in about 10 years thereafter this will require the united states to keep its fiscal and financial house in reasonable order in the meantime that may happen or not after the 2012 election so on that vaguely hopeful note let me let me conclude i'm happy to take questions and and comments well we have received a lot of food for thought indeed the affairs about the future some of them are new for me also and will uh ponder on them i would like to help you uh to understand better the speaker said that what has happened so far denies the doctrine of expansion of fiscal consolidation a that with rapid cuts of public expenditure that would boost the growth of the economy without restricting it this is an important statement some important supporters of the expansion and fiscal contraction theory live now well are italians like professor yalizina and perotti they are italians but they teach abroad and javatsy also yes uh they write for the korean newspaper together with alexina another additional note you might have noted that well speaking of the american situation the speakers spoke of fiscal drag the real meaning of this term uh in english is different from the one we give it in italian unfortunately uh journalists more than economists speak uh as fiscal drag in english that we use it in italian as a matter of fact it is bracket creep which is much more limited are there any questions you i want to break the eyes congratulations for your brilliant paper in particular as far as uh the role of history is concerned indeed we learn from history that things change and that many things happen over time my question is this i apologize for uh i speak italian this is the galilee language and the another language and i i like these people who were really farsighted my question is this it's about the euro do you think that euro is a real currency or is it just the indicator of the monetary mass so without bonds is a euro a currency or is it a simple indicator i tend to think that europe is not a currency is thus a crude indicator of monetary mass often so germans lose wars so if we don't change we will also lose the euro thank you i propose that we collect two or three questions thank you very much uh that was a really very interesting presentation i'd like to raise a problem about which i i read in newspapers uh but uh just between the lines is there a strategy in the u.s to explicitly weaken the euro or an attempt to eliminate the euro and if the answer is yes who are the actors and what are they doing to that end we have another question and then we'll answer them the lady is not using the microphone sorry sorry but this lady is not using the microphone she's speaking english anyway risk of democracy which we can we can see in china so what we may expect in the future about india thank you the um first of the three questions was about whether the euro is actually a currency or not um if you uh adopt the economist's approach to thinking about what money what a money is it's a a unit of account it's a means of conducting international transactions and it's a store of value then yes the uh the euro is a currency properly defined that's different from saying uh it's uh a viable currency one can then go on and have a debate about whether you can have a monetary union without a fiscal union whether you can have a monetary union without a banking union and whether you can have a monetary union without a political union in all those respects i i think the euro in its first 10 years was unique and and more or less historically unprecedented that those things have have tended to go together over time and and that's why i think those europe will have to move in that direction in order to uh cement the the euros status the second question was was about whether there's a conspir international conspiracy afoot to centered in the united states in particular to bring down the euro there there is an another prominent speaker at this festival um uh tomorrow at three o'clock i believe who may be better positioned to speak about what his colleagues and financial markets are are doing in the moment then i but i can i can report that there is certainly nothing in u.s government circles that is hoped for more than the survival of the euro at the moment there i think is an understanding that uh um uh greek exit and the repercussions that would flow from that and and more a more generalized euro crisis would be a big shock to global financial markets much bigger than the lehman brothers shock and that's not something that any responsible american politician wants now i i slipped a word in there which is responsible and we also have other other politicians i think in the united states but you know certainly in this presidential uh election year the obama administration which is uh you know um in control of the u.s treasury where the relevant financial policies are made understands that uh its election re-election prospects hinge on the strength of the american economy and that the strength of the american economy will depend heavily on what happens in europe in in the next six months so i'm sure all those uh all the aforementioned people inside the beltway are are hoping that europe draws a line under under its crisis and if anything uh voicing some impatience about whether about the steps that have been taken here already so the the third question i only got the last part which went and went into the microphone but it it i i think it was uh a question about this um long-standing comparison between india and china that they have different political systems what does this imply for um their economic prospects i i i think in the short run we're seeing again that and and and for their currencies um i i i do think that uh it is important to international investors both foreign central banks and and private investors to understand that the country in which they're placing their investments their savings is governed by rule of law that there is a certain level of transparency about bank regulation about financial markets uh et cetera and there are are are some doubts about um the chinese political system on those grounds democracy on the other hand on the other hand is no no guarantee that potential problems of of corruption that are also of of great concern to investors can be dealt with so i i don't think either either uh uh um strong autocratic government or democracy are are magic bullets from this point of view it all depends on how you do it and we don't know whether you know what what is shaping up right now to be an economic crisis in in india is going to be the clarion call they need to deal with their uh their corruption and and and red tape problems we don't know how current events or current political events in china which are moving very fast are going to develop over time those questions are above my pay grade the point of clarification many are listening without translation inside the beltway in america it means in washington at the government it's always thought-provoking to listen to you given the fact that you mention one of the person who will be speaking tomorrow are three i i think it's quite interesting that he's mentioning atomaszu apadociopa plan for europe in his um latest book i mean but i don't want to apply reflectivity to conspiracy theory i mean so i move on to my question and my question relates to your presentation at a certain point you said it's all about the banks and then you discuss about the european central bank now can i ask you a specific thought on central banks um in particular we saw in the last year quite a shift in the italian central bank they moved from daraghi as a governor looking and criticizing and advising the government to visco which is more looking into vigilance and letting the european level um acting politically so to speak and in terms of policy making so i was wondering what are your thoughts on central banking and methodologically about politics because it's a lot about politics and i wonder how those economies look at politics i mean into these circumstances thanks a lot i have two very quick questions do you think that the weakening of the dollar started in the 70s when the gold standard was abandoned second question as this is election year do you think that would be a quantitative easing for uh wage inflation and higher internal demand in germany and policy action like that are a feasible solution for the for the euro area and to a feasible solution to offset what albert char called the rotating lamps mechanism which is enforced nowadays in europe and on the other hand what you consider the first uh and the most important feature of an optimum currency area that the euro area needs nowadays thank you so i think excuse me i think the most important missing element in the architecture of the euro area is banking union and it's interesting to step back and ask why it's missing um if you look back at the academic literature analytical literature on monetary unions on optimum currency areas they talk about things like asymmetric business cycle disturbances labor mobility fiscal federalism they don't talk about banking union and and that was a failure on our part to an extent i think it reflects the fact that banking systems were still very were very heavily segmented along national lines financial liberalization and cross-border banking had hardly gotten underway in the 1960s and 1970s when the early literature developed and when we all started writing about this again in the 1990s we drew on that earlier literature which overlooked the uh the importance of having a banking union to go along with uh the monetary union i did write an article in 1993 which gets quoted now where i talked about the need for banking union but um we as a profession did not really appreciate the importance of that you asked also about the the rotating slumps problem and about whether it uh whether um fiscal stimulus and more spending in germany and northern europe is a necessary part of the solution to europe's problems and and yes i think it is the um comp the the difficulty of talking about the euro crisis is of course it is not a crisis it is multiple crises there's the banking crisis there's the growth crisis and there's the crisis of internal imbalances within europe so that problem of rebalancing europe of northern europe spending more as southern europe spends less of northern europe importing more as southern europe exports more there has to be adjustment on both sides the european commission came out what was it on wednesday with its reports on the euro area economy it missed this point again yet again for the 14th time in the last three years by not talking about how the these economies are part of a larger european economy and the adjustment has to be on both sides um in principle it will come in germany and the rest of northern europe in the form of higher incomes five percent wage increases for the german metal workers and others and they will spend more the process could be accelerated by some useful fiscal stimulus quietly german leaders i think are making all the right noises now about how they see the need for those uh adjustments and even for higher inflation in germany than would have been acceptable in the past the problem is that they've gone so far out on in the other direction convincing their constituents that all these are undesirable ideas and they would never go for them it's going to be difficult to change directions now quickly so there was a you you have stefano do you remember the other two there was one about central banking and in the middle there was one but there were yeah so i'm gonna pass on on on that one i don't know enough about italian monetary politics to say to say anything useful there i do think that central banks around the world are under political duress political attack because their actions have so exceeded their traditional mandates where they would focus on price stability then it became apparent they had to focus on price stability and economic stability and financial stability and other things as well i think we live in a world where um central bankers are the only adults in the room and they have to have to behave like it other policy is on hold the other adjustments we we would like to see are not being done so central banks have become the policy makers of last resort and that they are doing more than their mandates traditionally authorized them to do means that they are now the targets of rather vicious political criticism i i think that's that will remain the case and and be unavoidable until the other policymakers resume acting like adults is there any ladies who would like to intervene we have another question here professor professor eiken green uh what's your opinion about the proposal made by a number of people and that is largely supported in some emerging economies like russia china india to create a group or a basket of the main uh currencies uh the russian chinese japanese currencies and so on that could be used as a virtual currency for international transactions so it wouldn't really be a real currency like you know the euro the dollar or any other but really a basket of currencies something that should be used only for international transactions and which allegedly uh should uh limit the changes in uh interest rates now um do you believe that this is something that could actually be done in the next years and would that be the right choice um hello um actually i'm from germany so maybe it might be interesting to see a german view as well um only last week i've been attending a discussion among economists from germany and been quite interesting to see that from different sides of the aisle so to say um they agree that uh germany production must be uh be more expensive than it's been in the past because the divergence between let's say greece and germany is too big and greece can't tackle it alone but when i'm talking to german companies they commonly disagree with this finding and because they say um we are not in competition with greece or spain um at first but with china and um asian countries and this is what happened in the schroder years with the agenda 2010 that we have to be able to compete with china and chinese productivity and so if we start now increasing our production prices by increasing uh paying higher loans we won't be able to compete with those countries again so what would you answer um or what would you uh suggest um for german companies um is it are they well apparently they have to pay something for but what is more expensive not being able to compete with china anymore or not or losing the euro maybe thank you i'm very actually it's a pleasure for me to hear you directly after i'm hearing the mcilvenny fund interviews which i had used some times ago anyway the question is i'm glad you introduced the trading balances so it's not all about banks of course a bank run is about banks but the problem is not just banks um how we dealt with the lehman um bankruptcy is still a mess today but the only lesson we got out of there is i i see just more bailouts and more can kicking and this cannot go on forever is anyone working on bank crisis bank bankruptcies laws and even more on international bank bankruptcies because if probably we don't work about that then there is no choice on ba from banks other than restrict to their own countries and to their governments i apologize to uh the experts of finance because my question is going to be very naive it concerns occurrences originally of course there was gold that were then followed by banknotes supported by the gold and then the gold reserve system disappeared and so uh after a gold there was the dollar and after the dollar there's nothing else so my question is i know it's a naive question but how can the man in the street be sure that what they have in their hands are real banknotes and not just waste paper the the last question was great and and uh probably the only answer i can give is nothing is sure in life and if you had you had decided that gold was a better thing to uh uh hold rather than currency notes three or four months ago you would be very unhappy today that's not by no means a sure bet either but the the money issued by national governments or in europe's case by collections of national governments is um backed by the full faith and credit of those governments and those governments are answerable to you so that's another way of saying nothing is sure in life on the the banking issues i share your um concern that too little has been done so your question was is anything being done about these problems of uh our inability to resolve uh to close down when they are insolvent large cross-border banks and more generally deal with their problems the answer is much is being attempted so the financial stability forum uh another entity that mario draghi used to run uh the the bank for international settlements is trying to do this on deal uh create committees of regulators at the international level to deal with these problems and encourage the adoption of common standards for bank resolution and the like at the national level we have made some very modest progress i think in that direction um in the united states with dodd-frank very modest indeed some countries like the united kingdom uh think that because these problems are so intractable we need to force feed more capital to the banks so that they are less likely to get into financial problems given the difficulty we have in resolving them and here's a radical idea for you if big banks are so hard to resolve we should have fewer big banks but that you know the problem with that one is the political one um so remind me there was one there was one on germany and there was one on uh on a basket of currencies so yeah i i understand the um the reservations of german firms of german producers that higher costs mean less export competitiveness and i think the answers to that are too number one what's in the interest of an individual german firm may not be in the interest of the of the country as a whole and vice versa and number two if export competitiveness is uh a valid concern then there are other other instruments that can be used to encourage more spending by german consumers like fiscal policy what you described sounded like to me like a strong another strong argument for a bit of fiscal stimulus in germany and finally the idea of a synthetic currency unit made up of a basket of currencies un until recently people were talking about a basket of the currencies of the leading countries whether they they were an emerging market like china or an emerged market like the united states we have a version of that called the imf's special drawing rights which is you know purely electronic purely a bookkeeping instrument will it work as a replacement for the dollar or for the dollar and the euro and the one on the international stage no it will not work i think uh the chinese who were playing with the idea have backed away from it in the last couple of years they understand that the problems of governance and management are the problems the euro faces squared so it uh an international currency would not only be used for settling trade related transactions it would be a source of liquidity for people who needed more of it to intervene in in markets at a point in time we know from history that these different dimensions different aspects of international currency status go together that a currency is attractive for one use only if it's attractive to the others at the same time let's say that there was a liquidity crisis and more of this global unit was had to be supplied to markets over a weekend who would decide would the international monetary fund decide would you allow the expect the russian and the chinese and the indian and the brazilian governments to decide the problem that euro europe faces that there is a you're a single european currency but there is not a single european government to respond over a weekend when when a problem develops would be writ large if you thought about a serious role for a a global currency basket based or or otherwise okay thank you very much indeed uh thank you mr eichengreen and i think we need now to close this session which was definitely very interesting