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Bookmark and ShareJosh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

You know that something is amiss in the world when the entire Greek civil service goes on strike as an indirect result of  hedgefunds speculating against the Euro. 

Perhaps an answer might be found in Gordon Brown’s reaction when questioned as to whether Britain might offer financial assistance to Greece, as now appears inevitable for Germany and perhaps other big beasts on the contintent: ‘This is a problem for the Eurozone and its a problem that the Eurozone members will have to deal with…’, he said with just a hint of smugness.  

Quite.  The UK is not a member of the Eurozone, for whatever complex political and economic reasons, and right now that is looking like a pretty good choice.  It is often forgotten in these discussions that currencies, if allowed to, can serve an important role in providing economic feedback to the markets about the health of particular economy.  Following the financial crisis, the UK economy was left in a bad way.  Sterling depreciated rapidly against the Euro and to some extent the dollar.  This naturally helped to make UK industry more competitive in terms of exports as well as encouraging more domestic demand for goods and services – or ‘import substitution’ (more people holidaying in Cornwall and Scotland than Spain for example).  This, in turn, helped us with our budget deficit.

But Greece and other less robust European economies – Portugal, Ireland and Spain (the delightfully named PIGS) – have no such economic feedback.  Instead, when their economies faltered, they had to borrow more and more in Euros to maintain public spending, with their native industries competing directly in terms of exports with economic powerhouses such as Germany and France. 

The late ecological economist Jane Jacobs had a clever biological analogy describing this kind of situation.  Imagine the Euzone countries as people each doing different kinds of activities – sleeping, swimming, playing tennis, collecting the rubbish – that require different amounts of oxygen.  These people are properly equipped with diaphragms and lungs but share only one single brain and breathing centre.  Their ‘brain’ receives consolidated feedback on the carbon-dioxide level of the whole group without discriminating among the individuals producing it.  Everybody’s diaphragm contracts at the same time, with potentially catastrophic results.

The Eurozone is made up of discrete economic units at different stages of development.  This worked more or less (although Italy would probably disagree) when the Eurozone was growing, as the larger states were happy to make up for the lack of natural feedback to their less developed cousins through large income redistributions and subsidies. But when a shock like the financial crisis hits the system and everyone faces budget problems, redistribution (or bail outs) suddenly becomes problematic and inefficient, with the danger of moral hazard raising its ugly head once more. 

Leaving the Euro is not an option for PIGS – their debt is in Euros and this would not doubt trigger another financial crisis.  Another option, suggested recently by Charles Goodhart in the FT and long-championed by nef, would be to allow the creation of dual currency systems in these states, following the example of California when it ran in to trouble and in Argentina during the Peso crisis of 2000.  An internal Greek IOU currency could be created, to enable teachers and binmen to carry on working and businesses to continue internal trading, at a devalued rate against the Euro, reflecting more accurately Greece’s real exchange rate.  It is a radical option but the alternatives don’t look promising – IMF style austerity measures resulting in mass unemployment and violent protest (the Greeks have a record on that) or a bail out which could permanently undermine the integrity of the Euro project.

Jacobs argued in ‘Cities and the Wealth of Nations’ that the City and its hinterland is the true economic unit and the optimum size for a currency in order to ensure efficient feedback and allow effective import substitution effects.   We are a long way from that but the financial crisis has revealed the danger of the merciless pursuit of economies of scale – both in terms of the size of financial institutions like banks and now also currencies – at the expense of diversity and increased economic resilience. 

Probably not what Gordon was thinking when he declined British responsibility for the Euro mess, but you can bet your bottom ‘dollar’ he’s glad the UK never quite passed those five tests.

Bookmark and ShareJosh Ryan-Collins is a researcher in the Connected Economies team at nef.

The UK is sliding deeper in to recession and it is becoming clear that the Government’s strategy of ploughing billions’ of pounds of tax-payers money in to rescuing the banks is not working. And as the UK’s debt increases, sterling’s volatility increases, with a recent recovery still leaving it historically weak against the pound and the Euro.

The Conservative’s solution to the sterling problem is for the government to commit to a more ‘fiscally responsible’ strategy, aka reductions in spending (and thus debt), to try and boost the confidence of investors. That’s not much use to the predicted 3 million people who will be facing unemployment by the end of the year. Will Hutton’s solution is to keep pumping money in to the economy whilst also joining the Euro, a currency big enough to mimic the dollar as a reserve currency and hence less likely to be subject to damaging currency speculation.

But abandoing the pound will weaken further the UK government’s control over monetary policy, as nef argued back in 2003 when the UK was last considering Euro-membership. Interest rates will be set by the European Central Bank and reflect the interests of the biggest economies in the Euro Zone, of which the UK is just one (and a shrinking one) amongst many.

Perhaps, instead, we should be considering diversifying rather than centralising our currency system. There are some parallels with the banks here. We now have four major banks, all of which have become ‘too big to fail’ as opposed to the rich patchwork of credit unions and building societies that were actually connected to and interested in local and regional economies. Maybe we also need to re-link our money system and currencies to local and regional economies, so that if the national (or even international) currency collapses, others will continue to enable people to conduct economic exchange.

30,000 Lewes Pounds have been issued since the Lewes Pound was launched in September 2008 and 130 traders have signed up to use the currency

30,000 Lewes Pounds have been issued since the Lewes Pound was launched in September 2008 and 130 traders have signed up to use the currency

This is exactly what happened in Argentina in 2000 when the government was forced to massively devalue the Peso, previously pegged at 1:1 with the dollar. As the national currency became virtually worthless in the space of a few weeks, municipal authorities across the country began issuing regional currencies to keep teachers and nurses and public sector workers in their jobs. Similarly, during the great depression in the US over 4000 local currencies had sprung up around the country before they were abolished by Roosevelt’s New Deal program.

Complementary currencies do not displace national currencies but serve different, but no less important functions. They encourage people to spend more money locally, thus supporting local independent businesses, as with the Transition Network ‘local pound’ currencies, pegged one to one with sterling, currently circulating in Lewes in Sussex and Totnes in Devon.   Such currencies should also stimulate local production of goods and make local food growing more appealing for example, thus reducing carbon emissions and shortening supply chains.  The Swiss WIR, one of the few complementary currencies that wasn’t squashed by Central Banks post-depression, has been circulating in Switzerland since the 1930s and is now used by 62,000 small and medium sized enterprises.  A recent academic study showed that it is ‘counter-cyclical’ – i.e. that it is used more when the economy slows.

And, as George Monbiot and The Economist have recently pointed out, there is no reason why money should only be created as interest-bearing debt by private banks. Complementary currencies can also carry a cost in holding on to them which would encourage people to spend money in to the economy rather than hoarding it. Experiments in Switzerland and Germany point to the potential of such ‘free money’ in stimulating economies at times of recession and depression.

More research is needed to better understand the potential of complementary currencies and what optimal currency zones might look like in order to create a more sustainable and resilient monetary system. But, as nef argued in From the Ashes of the Crash, government and local authorities should encourage experiments in complementary currency systems and move beyond the ‘one size fits all’ approach that doesn’t work for banks and doesn’t work for currencies.


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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.