Skip to Content

A North Atlantic trade and currency zone?

Preparing for a possible break-up of the EU

David Cameron’s speech threatening to pull the UK out of the EU unless the other members agree to its demands may have started a process of withdrawal that could become irreversible. Although this outcome would be contrary to the stated objectives of the UK prime minister and British government, commentators on both sides of the English channel appear to view it as likely.

 

It is time to consider how to contain the fallout from such a disaster – for that is could be, for Europe and the world.

 

One route might be to build on the idea of a North Atlantic free trade area within which the euro block could pursue its economic, financial and political integration while being part of a wider area dedicated to free trade and freedom for capital movements. The EU is said to be interested. The aim would be, as Wolfgang Munchau points out in today’s FT, to enable products regulated in one jurisdiction “to be traded freely elsewhere in the zone without further regulatory impediment.”

 

But it needs to go a decisive step further. As all governments of the North Atlantic area follow policies aimed at similar objectives for price and financial stability as well as trade, those aims would best be achieved by establishing a common currency area as well as free trade zone. If successful, this would convert current inward-looking economic policies into an outward-looking approach. It would address the issues to which Gordon Brown rightly draws attention (see RP’s Diary: “Gordon Brown on stubborn national politics”). This reform would allow more determined policies of fiscal and monetary stimulus to be applied without sparking currency wars, as present policies threaten to do, and without setting in train another boom-bust cycle.

 

It would facilitate solutions to the problems of global imbalances, and the overhang of the weakening dollar standard. A new North Atlantic monetary standard, to which the US and Canadian dollars, as well as the euro and pound sterling, would belong, would make further reserve accumulation by emerging markets unnecessary, and currency diversification pointless.

 

Consider another scenario involving a break up or restructuring of the euro bloc. Then, close monetary cooperation between major powers on the both sides of the Atlantic – US, Germany, France, Canada and the UK, for example – would of course be even more vital.

 

For each country or for the euro area to ease the grip of global finance – to escape from the money trap – closer policy coordination along with internal reform are needed. But these steps require in turn a stronger international framework to enable them to be tackled in safety.

 

This would amount to a joint effort to procure the global public good of international monetary stability by establishing a common standard (and it should not be seen as the US ‘joining’ the euro, or the euro countries ‘joining’ the dollar area). Monetary policies would be dedicated to serving the long-term interests of all nation states in a stable international order.

 

The emphasis of domestic policies would switch to structural reforms. The rewards could be far-reaching. Credible evidence of closer cooperation between the world’s dominant monetary domains in establishing an agreed, voluntary monetary standard would produce a surge in business confidence. This is because it would signal to business that the major powers had learnt the true lesson of FinCR (the financial crisis and recession); it will put in place what had been missing in their response to the crisis.

 

The feeling that leading authorities were united in wanting to see reform happen, and that it was for real, would inject much-needed adrenalin into the world’s comatose financial system. Once European and US authorities got together, it would also be much easier to deal with wayward financial markets. It would indeed necessitate agreement on common rules for banking and finance.

 

Countries that currently peg either to the dollar or the euro would benefit from having a large, more stable, currency area to which they could link their currencies. Most of them are uncomfortable with, or will never be ready for, floating, but many have been torn between the dollar and the euro, especially when their exchange rates diverge, causing wrenching adjustments in their economies as the relative profitability of exports and price of imports from these areas veers unpredictably and causing big fluctuations also in income from services such as tourism as well as transfers, such as remittances by immigrants.

 

As the US, Canada and EU account for about 50 per cent of world output, one of the main sources of financial and economic instability in the world economy would then have been excised.

 

The success of such a common trade and currency area would show once and for all that the claimed benefits from freedom to devalue (manipulate) your currency are illusory. The most vehement opposition, unfortunately, will come from the central bankers.