Norms and Values
A Democratic Monetary Order

The possibility of creating a democratic monetary order as part of the European experience was greeted with scepticism at the time of the creation of the European Monetary Union. An equal scepticism is bound to welcome the project to establish a new international monetary order. The most dangerous alternative is to surrender to sovereignty and to war to resolve the tensions between the most powerful states and their vassals: monetary, financial and political disorder, writes Valdai Club expert Dario Velo.

The European currency, the euro, began to circulate at the beginning of the twenty-first century. The rules that were to govern the European monetary order had already been established by the Maastricht Treaty. The European monetary institutions had begun to be organised in 1979 with the S.M.E. The spread of the European Currency Unit, which preceded the euro, had been favoured by the development of a private E.C.U. as a contribution to the advancement of the European Monetary Union. The European Economic and Monetary Union project had been defined in the early seventies by the Werner Plan, which had capitalised on the political-economic contributions of Robert Triffin and Jean Monnet; a theoretical contribution was made by a third economist, Edmond Giscard d’Estaing. Edmond was the father of the future President of the French Republic, Valéry, who was to play an important role in the realization of European monetary unification.

This schematic chrono-history alone illustrates that the birth of the euro was not the result of a precise decision, defined at a precise moment in European history and in world history. European monetary unification is the result of a process that has been able to progressively manage the solutions of problems that seemed insurmountable. Even today, many are sceptical about the possibility of the euro’s survival, as a currency not supported by a state in the full traditional sense of the term. This process ensured the achievement of this impossible goal, a coin without a Prince to issue it.

The method followed is more important than specific success; it is this method that can guide the realisation of a world monetary order, before the birth of a World Federation. Intermediate steps will have to be taken; it is realistic to think that they will be implemented with the same logic as the gradual process of European monetary unification.

This is the vision that led Triffin and with him the federalists, who played a fundamental role in the birth of the European Central Bank. Disregarding this historical vision means not understanding the evolution of the monetary order that developed from 1950 onwards and is still in full development.

De-Dollarization of the Economy as a Way to a New Economic Order
The change in monetary policy of China and Russia is the most dramatic turn since the Bretton Woods Conference in 1944.

The list of the aforementioned stages in reaching the European Monetary Union can be read in two different ways, from actuality to reaching the founding phase of the process, or vice versa, from the beginning to the actuality of the process.

The two different readings lead one to focus attention on two phenomena, both real though different. Reading from current events to the roots of the process leads us to focus attention on the coherence and linear development of the monetary unification process. It emerges that each stage travelled was a prerequisite for the next stage; this is Jean Monnet's method of constitutional gradualism. The monetary unification process certainly had an economic dimension; it is the constitutional dimension that has been of crucial importance. Each step taken in the monetary unification process has enriched, according to a coherent logic, the constitutional tools available to support the functioning of the agreements.

The crucial objective pursued by Triffin, in collaboration with Monnet, is found, who ensured the orientation of the individual stages. The historical objective to be pursued is for Triffin the world currency; the process of European monetary unification was to constitute a stage along a path destined to lead to the world currency, inaugurating common rules. The success of the Euro teaches the method to go further.

Triffin understands that the road to world currency requires the creation of regional monetary areas as intermediate stages.

Europe is a favourable terrain for the creation of a regional currency, the euro, which could be an example of a supranational currency, experimenting with a method that will be valid, mutatis mutandis, in other regions of the world and worldwide.

The importance of the example provided by the European unified monetary area is given by the transition from an order based on the nation to an order based on the process of federal unification.

The alternative reading, which lends itself to a more technical analysis, goes from the roots to subsequent developments up to the topicality of monetary issues. Each stage, before being travelled, saw a very lively academic and political – economic debate. Opposing theses were elaborated, supporting everything and the opposite of everything. The possibility of reaching a realization always seemed extremely difficult, with a difficulty close to impossibility. The debate was fuelled by technical analyses, which came to understand individual aspects, paying the price of losing sight of the essential contents of the project under discussion.

Whoever innovates is destined to meet objections elaborated by those who possess the certainty which comes with a familiarity with the best traditions. Avoiding secondary problems and staying faithful to a long-term project does not lead to fashionable successes, but to a prize consisting of the awareness of contributing to a project of historical significance.

Analysing the stages of the monetary unification process requires an understanding of what were the strengths of the options that guaranteed the development and at the same time the solution of the problems that had matured. The analysis of the statute of the European Central Bank has this value, as the statute itself is the synthesis of the characteristics that a federal currency must assume.

A new international monetary order

The birth of the Euro changed the international monetary order, placing the Euro alongside the dollar as a payment and international reserve currency. In the immediate post-war period, the dollar was joined by the pound; the importance of the currency of Great Britain is derived from the past, it has seen the role it once played gradually decline, with the disappearance of the empire and a series of anti-historical sovereign options in the country.

Today the world’s central banks are witnessing a decrease of the share of dollars in their reserves, while the euro and gold increase. The latter testifies to a situation of uncertainty.
The euro partially rebalanced the international monetary order, but did not call into question its fundamental characteristics.

The international monetary order began to be questioned when the Russian Federation and China, thanks to their own development, found themselves in a position to aspire to give their currency an international role. The international role of the Chinese currency is the natural effect of the country's economic development, which has become the world’s third largest economic power, surpassed only by the United States and the European Union. In turn, the role of the ruble at the international level can be supported by the ability of the Russian Federation to export strategic raw materials, primarily in the energy sector.

Governance of the new international monetary order

In the spring of 2022, the Russian Federation asked European countries to pay for their oil and gas exports in rubles, rather than dollars or euros. This decision was interpreted as a response to the sanctions adopted against the Russian Federation. This interpretation does not take into account trends which had already developed internationally long before the outbreak of the conflict in Ukraine.

The problem that needs to be addressed is the organization of a new international monetary order, balanced and supported by the broadest possible consensus. The same is true for all international institutions. The order that emerged from the Second World War gradually weakened; an era is over and a new order needs to be organized with new or adequately renewed international institutions.

The formation of a new international order will take no short time. A broad debate must fuel decisions. Some fixed points can constitute a compass to orient the reflection in this constituent phase.

A new international monetary order is the first objective to be pursued. The monetary order is a prerequisite for building an economic order based on peaceful integration.
The current international monetary order is essentially based on the use of currency issued by the most developed countries: the United States and the European Union. The limit of this order is constituted by the gap in the interests of the issuing country and the international community.

The gap is greater in the case of the prevalence of only one currency, the dollar in recent decades; it remains, albeit to a lesser extent, as Washington has sharply expanded the money supply. This is what’s called "Triffin's dilemma".

Triffin's dilemma describes the choice that must be made by a country whose currency is used as a reserve currency, between two alternatives: to increase its foreign debt to meet the international demand for liquidity, or to favour the balance of its accounts with foreign countries, making the international community lack the necessary liquidity.

In the system founded in Bretton Woods, the first alternative prevailed, allowing the issuing country greater freedom of manoeuvre to favour domestic policies. This is an inherent asymmetry in the use of a country's currency as an international currency.

Consequently, it is difficult for a system conceived in this way to allow for the optimal management of international liquidity; an oscillation between an excess and a shortage of liquidity is more likely, with this having a negative effect on the cycles of the international economy, mainly to the detriment of countries that do not issue an international currency.
If you do not want to fall into monetary and financial disorder, two fundamental alternatives are viable.

The first is the organization of an international monetary system that uses multiple reserve currencies, issued by countries with the largest economies, overcoming the order based on a single currency that is the leader of the system.

The second is the creation of an international currency issued by a world monetary authority; this second alternative refers to Keynes's project for the creation of the Bancor and the initial experience of Special Drawing Rights.

In both alternatives, the need emerges, albeit in different ways, to organize an authority capable of governing the international monetary system.

The first alternative can count on the emergence of industrialized countries, not yet fully developed at the time of Bretton Woods, capable of issuing currency to be held in reserve. These would probably include the USA, the EU, The Russian Federation, China, India, Japan as well as, in a less central position, other countries that are currently expanding. This solution would reduce the asymmetry existing today between the United States and countries that use the dollar; the reduced asymmetry would remain between these issuing countries and the user countries. The creation of an international monetary authority, endowed with adequate powers, would be the necessary corollary to regulate the orderly functioning of the system.

The second alternative is more ambitious and can refer not only to the theoretical contribution given by Keynes but also to the experience gained with the creation of Special Drawing Rights. Keynes's contribution suffered from the culture of the time, which attributed prevalent importance to the centralist organization of nation states. Keynes's Bancor was aimed at affirming a centralized world government, a premature hypothesis in 1944.
A world federation will come into being no earlier than the 22nd century, and realistically over an even longer period of time.

The experience of Special Drawing Rights indicates that a process of world monetary unification is realistic, if articulated in successive stages according to a coherent project. There is the precedent of the ECU, which led to the Euro and the birth of the European Central Bank. The development of Special Drawing Rights in the direction of an international currency and then of a world currency poses constitutional problems that are difficult to define. In the case of Europe, the EMS began to outline a nucleus of the European Central Bank, which then became established with the birth of the Euro. This process to be repeated at the international level will have to overcome major obstacles, including the sovereignty of states of continental dimensions.

The institution operating today that could aspire to play a central role is the International Monetary Fund. However, it suffers from a limitation. On the one hand, the International Monetary Fund sees the dollar play a predominant role; on the other hand, the International Monetary Fund operates mainly as a development bank, while only secondarily respecting the logic of the Central Banks. The Bank for International Settlements has greater potential for evolution; its governing bodies, the states with the largest economies, could fall. Under the current conditions, the development of Special Drawing Rights requires the creation of a private market, as happened for the ECU.

The problem to be solved in order to support the evolution of Special Drawing Rights in a currency that is first international, then world-wide, is not the monetary basket that makes up the Special Drawing Rights themselves, but the governance of the system. The nature of the problem is not economic but constitutional.

A strong point emerges with respect to Keynes's project. Keynes was thinking of international institutions on the basis of the national model, the evolution of Special Drawing Rights requires an institution to govern the currency that is of a federal nature.
The new international cycle destined to begin poses similar problems to all international institutions. The cycle that is closing was founded on a leading power; the new cycle will be based on the convergence of several leading countries towards a world federal order, with federal international institutions.

A federal currency that respects subsidiarity

The experience of the Euro teaches many things, also from the perspective of the alternatives mentioned above. With the Euro and with the definition of a coherent statute of the European Central Bank, a federal currency respectful of subsidiarity has established itself. This is the revolutionary novelty of the European Monetary Union.

To proceed towards a new international monetary order, respectful of the constitutional processes on which to found regional federations and international governance which are capable of guaranteeing balanced development and an order supported by consensus, it is necessary to affirm the values ​​and rules of federalism and subsidiarity, both at the regional and the international level. The euro made it possible to verify that this solution is able to gather the necessary consent.

The possibility of creating a democratic monetary order as part of the European experience was greeted with scepticism at the time of the creation of the European Monetary Union. An equal scepticism is bound to welcome the project to establish a new international monetary order. The most dangerous alternative is to surrender to sovereignty and to war to resolve the tensions between the most powerful states and their vassals: monetary, financial and political disorder. The alternative is not between optimism and pessimism, but between realism and the illusion that the most powerful will always be the most powerful, between violence and the value of peace.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.