Growing interest in currency unions may reflect real benefits for some countries

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Page 223

Agrowing number of countries are choosing to give up their monetary independence to join currency unions, establish a currency board, or dollarize. Recent work by Robert Barro and Alberto Alesina of Harvard University has examined what is behind this trend, notably the decision to join a currency union. Both were recently at the IMF Institute to offer in-house seminars.

Prakash Loungani talks with Alesina about why fewer currencies may be a healthy development. The accompanying box summarizes Barro's seminar on how countries can calculate the costs and benefits of joining a currency union.

LOUNGANI: A currency is a source of national pride. Like the national flag. Or a national airline.

ALESINA: Yes, but it is misplaced pride. Printing your own money doesn't require much effort or competence. Better to be proud of your Olympic team, where there is genuine effort involved from your compatriots.

And countries often use the language of other countries, often even the language of their former colonizers.

If there's no loss of pride in that, why should there be any in using the currency of other countries?

LOUNGANI: So the trend toward countries giving up their currencies doesn't worry you?

ALESINA:We can't be sure it is a trend as yet, but it would not worry me-just the opposite-if it were a trend. What we do have is a handful of cases such as the franc zone in Africa; the use of the U.S. dollar in Panama and, now, Ecuador; and the European Union countries that will soon start using the euro.And you have prominent cases like Argentina and Hong Kong SAR, where the local currency is tied to the U.S. dollar through a currency board even though they continue to use their own currency. But, yes, the fact that we now have fewer currencies than countries is not in itself a cause of concern.

LOUNGANI:What's behind this development?

ALESINA:Many countries have misused monetary independence. They have not been able to pursue stable monetary policies-I mean policies that would deliver a low and stable inflation rate.And over the years we have learned to value low and stable inflation over a very active fine-tuning of the economy.

We don't believe anymore that fine-tuning gives such great benefits in terms of lower unemployment that it would be worth the costs of a very erratic inflation policy.

LOUNGANI: Does increased trade and integration- globalization, if you will-also contribute to the shedding of currencies?

ALESINA: You have to be...