With the value of the dollar jumping up and down against other countries' currencies, what if the world just agreed to use the same currency? It sounds like a simple idea. But like many simple ideas, it would come with all kinds of unintended consequences.
Recently, Chinese leaders argued for the creation of a unified global currency, a concept that has been proposed by a number of academics and political officials in modern economic history. While the idea has certainly not received widespread support, the success of the euro demonstrates that currency unification can work and may even have certain economic benefits. What ramifications might the adoption of a universal currency have on global trade and national economies in general?
— R.Z., New York
The Chinese proposal for a single global currency was part of Beijing’s effort to take a more prominent place among world powers at the recent G20 meeting. And they have legitimate reason to float the idea of replacing the dollar as the “reserve” currency — the medium of exchange used for the majority of financial transactions around the world.
As the holder of some $2 trillion in dollar-denominated savings the Chinese government has reason to be concerned about the long-term strength of the dollar. One time-honored method of reducing large government debt is to gradually inflate the currency to reduce the real value of that debt. That would also devalue that big pile of Chinese savings.
The dollar’s role as a reserve currency also gives the United States a dominant role in the global economy. That also means other countries are subject to U.S. fiscal and monetary policies over which they have no control.
So it’s no surprise that China would like to see another entity — it suggests the International Monetary Fund would be a good choice — issue a single global currency that would be used by all countries in place of the dollar. There would be many advantages to this. But it has about as much chance of happening as the adoption of Esperanto as a common global language.
A nation’s currency serves several purposes, one of which is a global proxy for the depth, strength and productivity of its economy and the stability of its political system. For all of the problems facing the United States, investors around the world believe the dollar is the safest place to park their wealth. That’s why, for the moment, interest rates on dollar-denominated debt like U.S. Treasuries are so low.
Currencies are also valued based on trade flows; if the Japanese yen is relatively weak compared to the dollar, and American car buyers can buy a higher-end Japanese model for the same price in dollars, they will choose the Japanese car. That means that countries that are more productive generally see the value of their currency strengthen, which gives people who earn wages in that currency more buying power when they buy products priced in other, weaker currencies.
This makes the Chinese proposal for unified currency somewhat ironic, given that for many years, China artificially suppressed the value of its currency, the yuan, to make its products more competitive when priced in other currencies. With a single, unified currency, countries no longer have the luxury of devaluing their local currency to make their product more competitive.
There are other problems with a unified currency — as countries in the Eurozone are learning. Though the first 10 years of sharing a single currency went relatively smoothly, cracks have begun appearing on the continent as the global recession deepens.
One of the original goals of the Euro was to raise the overall productivity of the European economy, as weaker, smaller countries had to become more competitive with larger, stronger countries. In fact, the reverse is true. Weaker countries enjoyed higher purchasing power without having to produce more goods and services. Overall productivity growth slowed in Europe from 1.6 percent a year before the euro to half that pace since.
The Euro also suffers from the fragmented political structure that governs the economy it represents. Since each member country can issue its own debt, the euro is used in 16 different bond markets. Each country sets its own tax and spending policies; some countries now carry debts larger than their gross domestic product.
So while they’ve been freed of the impact of currency fluctuation, euro countries now face a different — in some cases more painful — impact from the whims of global investors. Borrowing costs in heavily indebted countries like Spain, Greece, Ireland and Portugal are much higher than of Germany, which has accumulated the largest pile of savings.
That presents these countries with some painful choices they didn’t have to deal with back in the days when they could devalue their local currency. Italy, for example, faces some stark choices, according to a 2006 report by the Center for European reform, a London-based think tank. It can continue to muddle along as the slowest growing economy among euro countries. Or it could boost productivity, chiefly by cutting wages. Or it could leave the euro, devalue its debts and create its own currency. Doing so, however, would make it much more difficult to borrow.
Other euro countries with high debts face similar downward spirals. Those debts increase costs, forcing tax increases or spending cuts. Cutting future borrowing costs means raising productivity — either through layoffs or wage cuts or both. None of those choices is likely to win much support on Election Day.
Unless and until the world had a single government to maintain uniform fiscal and monetary policies, it's hard to see how any independent body would be granted sufficient powers to make a workable global currency — especially in times of global recession when the most painful choices are required. (This is what ultimately began the collapse of the gold standard in the 1930s.)
And as long as the global economy consists of a collection of local economies governed by multiple countries, a single global currency would do little to eliminate the resulting imbalances that result from the different economic policies pursued by those sovereign nations.
With layoffs happening everywhere in an order to cut costs and stay in business, has the government made any cuts? They aren't very efficient.
— Curt, Lindstrom, Minn.
Yes, government employment began shrinking from a peak in August 2008, according to the Bureau of Labor Statistics. In March, the sector lost another 5,000 jobs.
Like the rest of the economy, government employment has its ups and downs. Still, it has roughly tracked the growth of the nation's overall population. From 1980 to 2008, the latest figures available, the population grew by about 39 percent and the government workforce grew by about 35 percent.
Which is more or less what you would expect. The more citizens who demand services from their government, the more people it takes to provide those services.
As for the productivity of those workers, that’s a little harder to get at. The government stopped measuring productivity of government workers in 1994. That’s when productivity throughout the work force — public and private — began making great strides due in part to technological developments like the personal computers and the Internet.
Pre-1994, though, government productivity didn’t measure up very well. From 1987 to 1994, output per employee among government workers rose 0.4 percent a year. That compares with gains in output of 1.5 percent a year by "nonfarm business" workers and gains of 2.2 percent a year by manufacturing workers during the same period.
If readers can point us to more recent data on government worker productivity, we’ll include it in a future column.