The dollar and the euro need a stability pact

Taken from a speech delivered by Paddy Ashdown, the former Liberal Democrat leader to the Insead Alumni Association, in London
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The Independent Online

I am not the only person who is getting increasingly worried about the increasing speed of the world "money-go-round", where sums of money many tens of times the amount necessary to fund trade are now exchanged by currency and commodity speculators at the touch of a screen.

I am not the only person who is getting increasingly worried about the increasing speed of the world "money-go-round", where sums of money many tens of times the amount necessary to fund trade are now exchanged by currency and commodity speculators at the touch of a screen.

Many have discussed means of creating some damping mechanism to this exchange. I have always been attracted by the suggestion of Professor Tobin that there should be an international levy on every currency exchange, say 0.01 per cent. The proceeds of such a levy (£36m a day in London alone) could be used to fund the UN, or some element of it.

But could we tackle global currency instability at an even deeper level? In previous times, the international community sought to limit the surges of currency speculation by tying currencies to a standard. First, the gold standard, until the years between the wars. Then, after the Second World War, the Bretton Woods agreement.

It is generally held that we could not recreate a Bretton Woods-type foundation for global currency stability, because we could not replicate the special position held by the dollar in the wreckage after the war, when it was so strong that it could "hold the ring" while the agreement was constructed, and act as its lynchpin afterward. The special position of the dollar was eroded in the Sixties by the phenomenal growth of world trade and the regeneration of currencies such as the mark and the yen.

In the intervening period, all sorts of alternative schemes have been proposed for "damping down" the worst aspects of speculatively driven currency instability. But all of these have foundered either on an excessively theoretical view of what could be done, or on the impracticability of getting so many countries to agree. But something new has appeared on the world currency scene: the euro, the world's second most powerful currency, and capable, some argue, of challenging the dollar for first position.

Whatever the final position of the euro, however, what is unquestionably true is that the euro and the dollar combined now enjoy between them an economic ascendancy in world markets. What is equally important is that their shared monetary strength is matched by a political alliance that represents the fundamental axis of global power in our times.

The setting-up of a new form of Bretton Woods structure by establishing a currency stability pact between the dollar and the euro would be a major step toward economic global governance and a bulwark against currency instability. Establishing co-operation at the level of the euro/US dollar exchange rate between the EU, the US administration and Federal Reserve Board could help to stabilise this key exchange-rate relationship.

Of course, in a world of freely floating currencies and freely flowing capital, it would be unlikely to achieve more than a broad underpinning of stability, since the operation of exchange intervention and interest-rate policy would be sufficient only to hold relative currency rates within a rather broad trading range. However, the fact of active co-operation between the US and Europe would be beneficial and would help to boost real trade flows.

It would take much of the foolish proto-nationalism out of the single-currency debate in this country. On a less altruistic plane, it would also be strongly in the interests of both the US and Europe. And it would have the effect of strengthening the Atlantic alliance, which I believe will remain the only effective basis for upholding and strengthening our emerging framework for international law in the crucial decades ahead.

Matching the Atlantic security relationship with an Atlantic economic relationship now seems a very obvious thing to do, and one that will benefit the global economic climate and both sides of the Atlantic at the same time.

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