Common views on common currencies

Two new economic gurus have joined the debate on whether the euro can survive and what should happen it if does.

This year’s Nobel laureates – Christopher Sims and Thomas Sargent – have both offered a grim outlook for the future of the euro, saying the common currency will have a hard time surviving without a central fiscal authority.

Princeton’s Professor Sims says he has long been sceptical about the European Monetary Union’s single currency used in 17 countries.

"I wrote a paper a few years ago on the precarious fiscal foundations of the EMU," he said shortly after the Nobel announcement. "The euro was founded with a central bank but no unified fiscal authority [and this] made it extremely unusual and raised questions about what would happen when the need for fiscal and monetary co-ordination arose."

He added that the euro-zone nations,would “have to work out a way to share fiscal burdens and connect fiscal authorities to the [European Central Bank]. Right now none of those connections are clear ... and the prospects for the euro are dim."

Meanwhile, New York University's Professor Sargent said the eurozone problems mirrored in some ways the issues faced in the early days of the US.

"In the 1780s, the US was a basket case," with 13 sovereign governments – the 13 original states – each of which could raise taxes and print money. It had a very weak center, not having yet established a central bank or gained taxing power. Does this remind you of anything? They [the states] all have debt and the centre has debt. Like eurobonds, they are going at deep discount."

Meanwhile, the BBC’s Business Daily programme has noted the success (audio) of two multinational currencies in Africa that have been going strong since 1945. The West African CFA Franc and its sister currency the Central African CFA Franc between them cover 14 countries – mainly former French colonies in West and Central Africa.

The programme includes an interview with Professor Charles Goodhart of the London School of Economics on why the CFA francs have proved much more enduring than the 12-year-old euro – mainly because they haven’t become politicised. Of course, the French territories in the Pacific also have their own version of the CFA franc.

The African leader who gave up power
While in Africa, news has broken that it has taken two years to find a democratically elected leader who has voluntarily left office – despite the lure of the world’s most valuable individual prize.

The $US5 million Mo Ibrahim prize for good governance in Africa is named for the Sudan-born telecoms entrepreneur and is given over 10 years followed by $200,000 a year for life.

The prize hasn’t been awarded for a couple of years but has just gone to former Cape Verde President Pedro Verona Pires, 77, who qualified this year after stepping down in August.

Cape Verde is an archipelago off the West African coastand is described as a "model of democracy, stability and increased prosperity,” Previous winners are Botswana's President Festus Mogae and Mozambique's Joaquim Chissano.

Mo Ibrahim says the prize is needed because many leaders of sub-Saharan African countries come from poor backgrounds and are tempted to hang on to power for fear that poverty awaits them when they leave office.

President Pires played a key role in removing Portuguese colonial rule and became prime minister at independence in 1975 – a position he held until 1991 when his party was defeated in the first multi-party elections.

Ten years later, he bounced back to become president and stepped down after two terms, rejecting calls to change the constitution to remain in office, like several African leaders have done.

Incidentally, Cape Verde is now classed by the United Nations as a middle-income country and derives much of its income from tourism. The BBC’s Andrew Harding finds the prize somewhat patronising.

Angels and demons
If the decline of violence is sign of more civilised human values, as Steven Pinker argues in his monumental new book The Better Angels of Our Nature, then it might convince some that military intervention in the Islamic world is worthwhile.

Pinker makes the point that homicide rates differ in the US because states outside of the South are more likely to accept the state’s monopoly on force as a means of enforcing the law and upholding human rights.

By contrast, the more a society depends on self-help justice and a “culture of honour,” the more likely that society will be violent and accept practices that Europe began to reject in the 17th and 18th centuries, such as slavery, torture, despotism and cruel forms of punishment.

Based on his extensive research, Pinker dispels any notion that Islamic societies are peaceful or moderate, instead saying they have a well-documented “discourse of humiliation” that justifies the use of indiscriminate violence against any members of another civilisation they hold responsible.

He notes this wasn’t always the case: for example, when Islam embraced Greco-Roman learning during the European Middle Ages. But subsequent literal adherence to the Koran meant Islam didn’t go through a European-style age of reason and enlightenment, or separation of mosque and state.

The western world is paying the price for that, as the plight of the Coptic Christians in Egypt this week showed. The Middle East Forum has some background, as does the Hudson Review, while The Economist has some thoughts on whether Islam can ever be reconciled with democracy.

‘We never left,’ says Uncle Sam
The American free trade agenda is back on track after several years sitting unattended on President Obama’s White House table.

The proposed free trade agreement with Korea, together with ones involving Colombia and Panama, have finally gone to the House and Senate for approval as recently as today (Thursday NZ time).

They were all negotiated by the Bush administration but were held up by President Obama, aided by protectionist elements in both the Democratic and Republican parties.

The US government estimated back in 2007 that the deals would increase annual economic output by $US14.4 billion, though there might be downside for some American jobs, particularly in the textile industry.

The threat of recession, and the failure of other stimulatory moves since the global financial crisis, have helped changed President Obama’s mind and he is now saying free trade will create tens of thousands of jobs – as it should given the state of the US dollar.

A chat with visiting US scholar and former diplomat Dan Twining in Auckland last week cleared up some points. He admitted the US had “walked back” from the pro-free trade policies of Bush and Clinton, and that his country had “lacked economic leadership”in recent years.

But he was also anxious to dispel the notion that the US had disengaged with Asia or the Pacific, or that the key issue was not a matter of choosing to trade with either the US or China.

“We are just here doing what we’ve been doing for 60 years in Asia,” he said, emphasising that the US remained the dominant trade partner of Korea, Japan and other Asia nations.

The Economist has this column on the “curious durability” of America’s Asian alliance.