Mark Milner and Charlotte Denny
Britain may be sceptical about the virtues of signing up for the euro but others, from Latin America to the Balkans, are falling over themselves to adopt someone else’s currency.
Ecuador announced this week that it plans to replace the sucre with the dollar as the country’s legal tender. Australian and New Zealand dollars hold sway in the South Pacific where the French franc does not act as the local currency.
Estonia – already pegged to the German mark – this week began debating adopting the euro in 2002. Montenegro, still part of Yugoslavia, is already using the mark in parallel with the Yugoslav dinar.
And in Moscow “there isn’t an adult who doesn’t know the rouble-dollar exchange rate”, said one Western resident.
Nobel Prize winner Robert Mundell predicted this week that in 10 years’ time the euro will be used in 50 countries, the dollar will have spread throughout Latin America and much of Asia will look towards the yen.
Professor Steve Hanke, from Johns Hopkins University in the United States, reckons much of Central and Eastern Europe will have adopted the euro directly or via a currency board within the next few years.
Supporters of the changes claim that a widely held currency delivers stability, an anchor in the battle against inflation. Hanke, an adviser to Montenegro and Ecuador, argues that adopting an external currency, directly or indirectly, works: “Currencies in developing countries rarely float in a sea of tranquillity.”
He blames weak monetary authorities printing money as a short-term fix. The solution is to take control of monetary policy away from expediency-driven central banks to ones with a track record of providing stability. This can be done through dollarisation or by adopting a currency board. Countries opting for such external discipline have experienced faster growth, and lower inflation and budget deficits.
The downside is, as the Federal Reserve makes clear to countries toying with adopting the dollar, that it will set interest rates only in response to economic conditions in the US. The message from Washington is “you are on your own”. Nor can the political consequences of what can be seen as reverse colonialism – surrendering control of economic policy to a powerful but indifferent neighbour – be overlooked.
Is this an argument for Britain signing up for the euro or shunning the single currency? Hanke draws a sharp distinction between dollarisation and monetary union. The first involves giving up control of monetary policy. That can be reversed. The second involves surrendering monetary sovereignty. “And the only way out of that is if the whole thing blows up.”