After the euro... the mundos?

Some 10 years before any politician, economist, banker or journalist in Malta had first mentioned the concept of a single European currency, I was writing about it and researching it in depth. Heartened by that experience I now feel brave enough to say that some 40 years from now people in many other rich countries - and some in relatively poor ones - may well be paying for their shopping using the same currency.

Prices will not be quoted in euro, dollars, or yen but in, let's say, the "mundos". The mundos will be accepted by companies and shoppers because it will be more convenient than today's national or continental currencies, which by then will be looked upon as that strange cause of much disruption to economic life in the late 20th and early 21st century.

Let's go back to, say, around 1988. Predictions in the above vein at that time were outlandish but actually even five and 10 years before then, proposals for eventual monetary union had proliferated, only to be quickly forgotten in the setbacks of 1987. The governments of the big economies then tried to edge an inch or two towards a more managed system of exchange rates - which seemed a logical preliminary to radical monetary reform.

As a result of the lack of cooperation in their underlying economic policies, they horribly bungled it all and brought about the rise in interest rates that heralded the stock market crash of October 1987. Exchange rate reformers came out with a bloodied nose as the market crash taught them that pretence of policy cooperation can be worse than nothing and that until real cooperation is feasible (i.e. until governments surrender some economic sovereignty) further attempts to peg currencies would fail.

While governments everywhere still display problems with reaching and (harder still) sticking to international agreements about macroeconomic policy, the conviction is again growing in the more knowledgeable parts of the markets that exchange rates cannot be left to themselves. Just remember: the Plaza agreement of September 1985, then the Louvre accord: They were emergency measures to deal with currency instability crises.

Between 1983 and 1985, the dollar rose by 34 per cent against the currencies of the US's trading partners. By 1988, it had then fallen by 42 per cent. The pattern of international comparative advantage had been hit more drastically in three years by these exchange games than basic underlying forces might have done in a whole generation.

The world's major central banks then jointly intervened in the currency markets, suggesting some sort of belief in the cause of exchange-rate stability. To be fair, there were the Japanese then who, regardless of the Louvre's embarrassing failure, seemed to take seriously the idea of EMS-like schemes for the main industrial economies.

And so, on and on, that is the way it has gone. Not long after the next currency agreement is signed, it will go the same way as the one before. Let's keep that in mind as we read about "a new Bretton Woods being needed". Governments everywhere are far from ready to subordinate their domestic objectives to the goal of international financial stability. Perhaps some more big exchange-rate upsets (is the current dollar/euro dichotomy an example?), more stock market falls and probably a recession or two, will be needed before politicians (especially in the big countries) are willing to face squarely up to realities.

Yes - a muddled sequence of emergency followed up by patchwork, followed by emergency, stretching out far into the future.

But now here's the main point at issue. As time passes the damage caused on a worldwide basis is increasingly mounting and the very trends that are pushing it are making what readers might describe as the utopia of world monetary union feasible.

From the early 1970s onward, the biggest change in the world economy was that flows of money replaced trade in goods as the force driving exchange rates. As the world's financial markets integrated, differences in national economic policies disturbed interest rates (or the expectations about them) only slightly, yet still beckoned huge financial asset transfers from one country to another.

These transfers swamp trade revenue flows in their effect on demand for - and supply of - foreign currencies, and hence in their impact on exchange rates. Indeed telecom technology's advance makes these transactions cheaper and faster, and when you have uncoordinated economic policies, currencies can indeed get only more volatile.

Advanced technology bolsters another trend: That of ever growing opportunities for international trade. Reduced transport costs make it easier for Chinas and Indias and Russias to compete in the markets between themselves and the others out there elsewhere in the world. Is it so impossible to see asserting itself the law of one price (that a good should cost the same everywhere once prices are converted into a single currency)? Politicians permitting, national economies will follow their financial markets, i.e. becoming ever more open to the outside world. This is not fantasy: Ask the WTO.

And in the future this will apply to labour as much as to goods. Part of the reason will remain migration but a possibly bigger part will be the fact that technology makes it possible to separate the worker from the point where he delivers his labour. Aren't Indian computer firms already processing New Yorkers' pay cheques?

So, as the trend of dissolving national economic boundaries continues, the appeal of a currency union across at least the main industrial countries will - here's my prophecy - come to appear irresistible to everybody. Or should I perhaps exempt foreign exchange dealers and governments from that? In the Mundoszone economic adjustment to shifts in relative prices would happen smoothly and automatically, akin to what happens today between different regions within large economies. Just think how much the absence of all currency risk would spur trade, investment, employment. Isn't the EU a working example of this?

My vision of a Mundoszone sees (again like in the EU!) tight constraints on national governments. No such thing - again - as a national monetary policy. The world supply of mundos will be fixed by a new central bank (the IMF totally restructured?) in whose charge would also be the world inflation rate, hopefully within narrow margins.

Each country would be able to use taxes and public spending to offset temporary falls in demand but it would have to borrow rather than print money to finance its budget. Just think how much more carefully than today governments would be forced to consider their borrowing and lending plans.

All of this amounts, as we saw, to a big loss of economic sovereignty but the trends that make the mundos appealing are taking away that sovereignty in any case. Even in world of floating exchange rates many governments have seen their policy independence checked by an unfriendly outside world.

As the years roll on I see trends towards economic integration as offering governments a broad choice. They can go with the flow or they can build walls. Preparing the way for the mundos must mean fewer pretended agreements (several Mediterranean nations have become very apt at this!) on policy and more real ones. It must mean both allowing and actively regulating the private sector's use of an international money, initially alongside national currencies but then definitely replacing them as people will eventually vote with their wallets for full currency union.

The mundos can probably start as a cocktail of national currencies like the IMF's Special Drawing Rights. In time, however, in terms of national currencies this would cease to matter because people would choose it for its convenience and the stability of its purchasing power.

Of course if you think that all of this is star-gazing just think of the alternative. What that alternative really means is the preservation of policy-making autonomy. This will mean continued proliferation of trade and capital flow controls in many parts of the world. It will also fit in beautifully with the political cycle timeframes that still enslave the mindset of many decision-makers in many governments all over the world, i.e. buying themselves time.

They will think that they can eternally continue to deploy fiscal and monetary policy, and manage exchange rates, without inhibition, and tackling the resulting bursts of inflation with prices and incomes policies. That to me it is really a growth crippling prospect.

Will you join me in penciling 2050 as the year for the mundos and, God willing, welcoming it when it comes? I'll probably not be around but, who knows, someone might remember "I told you so"!

• Dr Consiglio teaches international economics and banking in the University of Malta.