In this think piece, Vishal Wilde puts forward a novel proposal for the Eurozone, based on a system of competing currencies. This could well be the tonic for a febrile Eurozone, damaged both by the timidity of the European Central Bank and the monolithic nature of the existing currency arrangement. Many call for the dissolution of the Euro; more than 40% of Italians want to return to the Lira, 1 in 3 French citizens want to exit the Euro and, similarly, support for the Euro amongst other member-states has steadily dwindled. Many want to regain (what they believe to be) some degree of control over their money supply. However, this does not solve the root of the problem and will only provide temporary relief – if at all. Any expected relief from (solely) reversionary measures is likely to be offset by the uncertainty associated with what a return to the previous paradigm, at this moment in time, might entail. Furthermore, since one of the main benefits of the Euro is lower transaction costs, a reversion might lead to increased transaction costs. There is also the immediate risk of currency wars that could be trigged from re-granting unfettered national sovereignty over money supply. Murray Rothbard wrote in ‘What has Government done to our Money?’ that former US Secretary of State Cordell Hull repeatedly pointed out that the currency wars in the 1930s were a major cause that led to WWII. This is a more general cause for concern when we consider the aggressive devaluation of currencies that many major central banks are indulging in (through one medium or another).

The Proposal

1. Let Eurozone governments print their own national currencies. 2. Let the ECB continue printing Euros. 3. Require Eurozone governments to allow their citizens to pay taxes in any Eurozone currency (Euros, domestic or foreign national currencies). 4. Let all citizens and businesses in the Eurozone trade in any Eurozone currency (Euro, domestic or foreign national currencies).

Potential Benefits

1. Freedom of choice of currencies

For example, French residents, companies etc. would be allowed to pay taxes and trade in Euros, Francs (Belgian or French), Deutschemarks, Lira, Pesetas, Escudo, Guilder etc. and so would all other countries in the Eurozone. Therefore, the Euro would no longer be the Eurozone’s sole legal tender. In this way, currency users would have increased freedom to choose between using the supranational Euro, their domestic currency and various foreign currencies.

2. Pragmatic reconciliation of rising and alarming nationalist sentiment

This would pragmatically reconcile both those who wish to remain with the Euro and those who want to leave it whilst preventing one group from unilaterally imposing their will on the other. It would be a stabilising concession to the rampant Nationalism sweeping across the EU.

3. Increased competition between Eurozone central banks

Eurozone central banks would have to compete with each other to ensure that their currencies are stable and capture some market share rather than their being excessively devalued (since the benefits of excessive devaluation or overvaluation would be limited because those who are harmed would simply switch to another currency).

4. Benefitting both exporters and importers

In all countries, there exist regional disparities in economic structure. Some regions, towns, villages, cities, or boroughs are more heavily weighted toward certain industries, types of employment, export, domestic consumption etc. By allowing several currencies to coexist across many countries, this would enable areas and communities that make most of their living from exports to use a weaker currency as their predominant means of trade. This would effectively provide exporters with the option of boosting their sales by selling in relatively ‘cheap’ currencies. Conversely, those areas and entities that import more than they export can use a stronger currency as their predominant money; this would enable them to keep inflation under control (thereby preventing the suffering from imposed price rises, amongst other things, that would occur if governments had a monopoly over the money supply and artificially devalued it in the name of exporters and at the cost of importers). For example, those operating in tourism hubs could sell their goods in cheaper currencies in order to revive their local economies. Both importers and exporters would benefit from an arrangement where people could continuously choose the most advantageous currency.

5. Proliferation of currency-related technologies

Despite the potential complication of managing delivering different paper monies across various countries, this situation could become easily feasible in the near future when we consider the rapid proliferation and development of smartphones, e-wallets etc. This arrangement would enable and indeed encourage the proliferation of e-wallets and other technologies that will allow people to transact and switch between several currencies in a seamless manner rather than being constrained to one. It would reduce the need for cash in the first place and would encourage the Eurozone to move towards being a ‘cashless’ society (also, incidentally, reducing the scope for fraudulent activities in currencies).

6. Increased legitimacy of new national currencies through mutual recognition

Suppose that any one country such as Spain, Greece, Italy or Portugal decided to unilaterally leave the Euro, their newly established national currencies may not immediately experience the approval of financial markets. If, however, all countries printed their own currencies whilst allowing taxes and trade to be conducted in either that, the Euro or other Eurozone currencies, this would mean that each member-state’s currencies would gain some immediate legitimacy through official recognition by other nation-states.

7. Increasingly diversified National ForEx Reserves Portfolios

Governments would have an increasingly diversified portfolio of foreign exchange reserves if all entities paid taxes in and traded using different currencies. This would reduce risk to the taxpayer associated with exposure to only one currency. Furthermore, the Eurozone is one of the largest economic zones in the world and this might create an alternative to the dominance of the dollar as a global reserve currency. Of course, governments could simply exchange taxes for their preferred reserve currency but it provides a natural alternative and, in any case, increases the volume of foreign exchange transactions and, therefore, transaction costs.

8. Increased money supply and demand in the Eurozone

With potentially 18 central banks in the Eurozone printing their own currencies (in addition to that printed by the ECB), there would, undoubtedly, be an increase in the money supply across the Eurozone and this would help stimulate the demand deficiency that is a major cause of its economic stagnation.

Potential Drawbacks

1. Complicates tax-collection

However, through the natural proliferation of currency-exchange technologies for peoples’ daily transactions, it would also make it more difficult for tax evasion. Furthermore, the same rate would be applied regardless of which currency one uses or pays taxes in.

2. Elimination, by competition, of some currencies

Certain national currencies may be unable to compete against others and if they are eliminated by the competition, it would be for no reason other than that people found it more advantageous to use other countries’ currencies instead of their own.

3. Devaluation of the Euro

If this policy is announced, the Euro might get devalued as markets expect other currencies to emerge and challenge its dominance. Initially, this may seem destabilising but it could work to improve Euro area exports and, although inflation might increase, the Eurozone is well below its inflation target. Furthermore, the Euro is still likely to be more valued than some countries’ newly printed currencies (and, conversely, less valued than others’).

4. Makes the Euro superfluous

If there will potentially be 19 currencies (18 national and 1 supranational), one might ask why we need the Euro at all? The Euro is needed because, if it were suddenly eliminated, it would be a shock to many who are accustomed to it. Leaving it as an option means that there won’t be market chaos as businesses and households of all sizes faced major uncertainty and people could, instead, gradually switch to other options. Since it has been the sole legal tender for so long, it is likely that it would continue to play a major role in intra-EU and international trade (presuming a prudent ECB). 

5. Increased transaction costs

The Euro was supposed to eliminate these and they would make trade more costly under the proposed arrangement. However, if people regularly used different within a country as well as when going abroad or trading with foreign entities, the overall volume of Forex transactions will increase. Then, currency-exchanging firms would look to capitalise by offering cheaper, competitive rates to attract individuals and businesses. Whether Forex transactions costs would be nil in the Eurozone as with the Euro is debatable but it would certainly be lower than the arrangement preceding it and, in the former case, the benefits from a greater money supply, stimulated demand, more competitive exports etc. might offset any incurred transaction costs.

6. Loss of central banking as a policy tool

Not necessarily. Although there would no longer be a sole legal tender (monetary monopoly) across the Eurozone, there would be several governments that would still have the power to co-operate and compete to produce efficient outcomes (albeit, each of them with limited influence so that we don’t remain in the situation where entities have no alternative but to constantly lobby the ECB) and so that we are not at the mercy of one official institution.

Summary

Enabling central banks to print national currencies once again whilst allowing citizens and other entities throughout the Eurozone to pay taxes and conduct trade in any of them (whilst preserving the ECB in a co-existent, co-operative relationship) would not be privatisation or free banking but it would be a pragmatic liberalisation that could help boost demand, increase trade and create jobs.