A price worth paying for stability?

ALL OF A sudden, the idea of monetary union is the height of fashion - except, that is, in Britain, where we still worry ourselves sick about loss of economic sovereignty. The euro is off to a flying start, Joseph Yam, head of the Hong Kong monetary authority, has suggested a single currency for South-east Asia, and now Agentina's central bank is reported as wanting to swap the peso for the dollar. Well, who wouldn't?

But actually the idea is not quite as harebrained as it seems. President Carlos Menem has long said that he would accept full-bodied dollarisation before devaluation, and in any case, the currency board system operated by Argentina is already that in all but name. Unfortunately, the currency board is far from foolproof. As Hong Kong discovered last year, once investors start to believe it is unsustainable, it forces interest rates up to punishing levels, thus further undermining economic vitality.

With the Brazilian real now in free-fall, President Menem is beginning to feel the same sort of heat. But is it realistic to abandon the peso altogether? Just consider what is proposed here. Argentina in effect becomes part of the US economy, but it has even fewer membership or citizens' rights than we do here in the UK. It would have no say or influence over US monetary policy, nor would its people be able to go and work in the US if economic conditions were poor in Argentina.

In the US, free movement of labour is often not enough to bring about the necessary economic adjustments between states. So yes, even in the land of the free, inter-state transfers, in effect subsidies, do take place through the federal budget in order to relieve economically depressed regions. That wouldn't and couldn't happen with Argentina. Nor would there be any lender of last resort to add stability to the banking system.

For any country, even a developing one, to think this a price worth paying for monetary stability rather puts our own concerns about the euro into perspective. Membership of the euro, whatever its drawbacks, at least gives you a seat on the European Central Bank.

It also gives free access to the European single market, backed by harmonised standards and rules of fair play, as well as the right to work anywhere within the union. Finally, it gives influence through the council of ministers and the European parliament over European law. None of these things would be open to Argentina as part of the dollar economy.

All of which makes the second part of the Argentine central bank's proposal - a "monetary association treaty" with the US - a particularly intriguing one. What President Menem is saying is, give us a few concessions - a proper free trade agreement, a little bit of a say in monetary policy, perhaps even US working permits for our citizens. Predictably, this was getting an exceptionally cool response in Washington yesterday, but there is no doubt that it has rather put the US authorities on the spot.

Bill Clinton, Tony Blair and others with a supposed role on the world stage, drone on and on about the need for a global regulator, an early warning system to head off nascent financial and economic crises. They want credit guarantees, economic reform across the world, stabilisation pacts and greater transparency. They want rules to govern the hedge funds and speculators that their own rich economies have given birth to. And they want the message of a third way between the disciplines of capitalism and the needs of community to be spread around the globe.

But when push comes to shove, are they prepared to stray beyond the rhetoric? Is the US really prepared to do the necessary in spreading the dollar and the galvanising power of its free-market economy throughout the Americas. Self-interest dictates that it is not, however sympathetic it might feel towards President Menem's begging bowl.

On the other hand, all conventional medicine has failed with Brazil, which now poses a very real threat to the US economy itself. Unconditional dollar regimes exist elsewhere in the world, most notably in Panama, and increasingly in Russia, whose currency even its own citizens do not want to take. But you only have to look at the misery of these countries to realise how ineffective monetary union without full economic union can be. President Menem deserves a hearing. Whether anyone on Capitol Hill has the vision to listen to him is another thing.

YOU CAN barely turn the page of a newspaper these days without reading about the millennium bug in some shape or form. Everyone is exercised by it, and none more so than the banks. At National Westminster Bank alone, pounds 150m has been spent trying to eradicate it. With that kind of outlay, it is to be hoped they have succeeded. Certainly that's the message they want to get across, for even the remotest suggestion that they might not have done could in itself be enough to cause chaos in the banking system across the turn of the century.

Plans are already well advanced at the Bank of England to deal with a mass run on cash as we approach the new year. The printing presses will be running overtime to deliver it, the reasoning being that whatever the banks say or do to waylay people's fears, most people will in the end be guided by the better-safe-than-sorry philosophy. Many will stockpile cash just in case the cashpoint, switch and credit card systems fail at midnight.

I read somewhere that the Chinese authorities have instructed all their pilots to be in the air at the assigned time in an attempt to demonstrate to the world how well prepared they are for the wretched bug. Our bankers might perhaps think it unfortunate that they do not possess similar powers of oppression. Instead they have to prepare for the very real possibility of a mass switch back to the power of cash, at least for a month or two.

Perhaps more worrying, the millennium bug is also going to have a quite profound effect on banking risk assessment. NatWest, Barclays and Lloyds TSB might be satisfied that they are fully bug-free, but how certain can they be of their counter-parties?

As far as banks in the developed world are concerned, it is reasonable to assume all necessary precautions have been taken. But what about less well supervised and wealthy areas of the world? And can you be absolutely certain that an apparently safe counter-party isn't exposed to a banking system breakdown elsewhere.

The upshot is that as the millennium approaches, banks will progressively wind down their exposure to high-risk counter-parties. To the extent that they don't, they will charge a big premium for the business. As always, the main losers in this process are going to be those in undeveloped countries - in other words, the poor. As we approach the end of the twentieth century, we seem to be no nearer finding a fairer way of dealing with the discriminatory power of wealth than we were at the beginning.