- The UN recently proposed establishing a global central bank and currency to "fix" the global economy. But don't expect global monetary union anytime soon.
- Global central banking is by no means a new idea—it was first proposed at Bretton Woods and again in the 1970's.
- The EU, three decades in the making, provides us with the best example of significant regional monetary union to date.
- The chances a far more complex and powerful organization like a global central bank can navigate domestic politics quickly (or more adeptly) are pretty slim.
Remember when British mop-tops were the ultimate representation of rebellious youth? With its release of the definitive Beatles collection this week, EMI is betting plenty of folks do. Speaking of nostalgic throwbacks, a recently released UN report calling for a global central bank and currency to "fix" the global economy evokes the post-war golden age of international organizations. But unlike the Beatles' rapid-fire eight year recording streak (to this day an unparalleled evolution of artistry and, ahem, consciousness), don't expect fast action toward global monetary union—or necessarily any action at all.
Proposals to control international capital markets date back to famed economist John Maynard Keynes' support of a global central bank at Bretton Woods in 1944. He called his hypothetical global currency the "bancor". Today's proponents of international capital controls favor a global currency based on IMF Special Drawing Rights (SDRs), an idea originated in the 1970's. Though cyclically resurrected (particularly after bear markets and recessions), neither Keynes' bancor nor SDRs have ever amounted to much. Other economic integration proposals—1999's North American currency (the "amero"), for instance—have largely been left moldering on obscure record racks.
But there's one shining example of regional capital markets integration. The amero pitch came on the heels of the European Union's (EU) adoption of the "euro" in 1999. The story of the euro is instructive for anyone wondering how cries for global central banking may impact investors. Simply—adoption of a global deal on par with the EU will be agonizingly glacial. The EU originally brought together a group of developed, wealthy Western nations. Yet even with such a homogeneous set, it took three decades of capital controls and negotiations to bring the European Central Bank (ECB) and euro into existence. And still the EU is fraught with foot-dragging and dissent (eg. 2008's Irish rejection of the Lisbon Treaty).
The obstacles in the way of a global central bank are magnitudes more formidable than those that faced the EU. Such an organization would have to integrate countries of widely varying economic health and political ideology. It would require politicians and constituents give up sovereignty to a supranational central bank. Yet states can barely muster voluntary agreement on global free trade pacts (see this decade's WTO Doha round of trade negotiations). And vocal calls for global cooperation at G-20 summits (like this week's) rarely translate into significant action. If experience tells us anything, the chances a far more complex and powerful organization—like a global central bank—can navigate domestic politics quickly (or at all) are pretty slim and thus won't affect global stock markets in the near future.
Keynesian dreams of global central banks and bancors will likely be released and re-released, but they won't sell any faster now than they have for the past 65 years. As we've noted in this space often, to the globally diversified investor currencies are merely flavors of money and their relative flows matter little in the long run. Or, said more artfully, in the end, the currency you take is equal to the currency you make.