A Dialogue between Martin Feldstein, Otmar Issing and Robert Mundell

These are excerpts of a conversation chaired by Dominick Salvatore, on "The Dollar, the Euro, and the International Monetary System" organized in Philadelphia on January the 8th by the American Economic Association, and reported in the Italian economic newspaper Il Sole-24 Ore by Mario Platero, whom we thank for the permission he gave us to reprint his article.
Is there still a problem for the Euro?
FELDSTEIN - The problem is always the same: how to make the existence of a single currency compatible with a decentralized economic policy: there is no market control instrument available to keep in check the public deficits of individual States. The national governments cannot make use of monetary policies or exchange rates. In America there is a much higher mobility of the work-force, there is one language, there is more wage-flexibility. This allows for more rapid adjustments. In Europe there is just the opposite: low work-force mobility, less flexible wages.
But there is the Stability Pact, which imposes limits and homogeneity on fiscal policies. Do you believe the mechanism is too rigid?
Of course in Europe there is a need for anti-cyclical measures, but it is not easy to modify the Stability Pact. It was also difficult to apply it: the deficit has been higher than 3,5% in France and Germany, there were to be fines as high as 0,5%, but the Council of Europe did nothing, it put off the fines. The Commission appealed to the Court and won. But the fines remained a dead letter. This is not a soft start. Now, in proposing adjustments, Germany, the first contributor to the European Union, argues that its contributions to the EU should be excluded from the computation. France, which spends more than the others for defense, argues that military expenditures should be excluded, and so on. The new Commission President took everything into his hands and said he will let his decisions be known. My impression is that something will have to be done, however it shall not be tailored to anybody's interests. When the Stability Pact was drafted, there was the illusion that a 3% deficit will only be reached in anti-cyclical situations, and in all others the budgets will be balanced. Well, things did not go like that. A 3% deficit over the GDP could be reckoned over a mid-term period, allowing greater manoeuvering freedom, but then new parameters would have to be taken into consideration, for example employment levels: if unemployment stays high for many years, we are not in the presence of a cyclical weakness. Another flexibility element may be considered, namely, eliminating non-recurring expenditures that do not have to be financed by tax revenues in the current year.
From a Euro-sceptic to a Euro-protagonist, Otmar Issing of the ECB.
ISSING - My first remark is that six years ago, when people started to talk of euro vs dollar, there was a minimal interest, and scepticism was prevailing. Today, the euro is a protagonist. And it is so in a natural way. Our choice for the euro's international role was clear: we will not be in a position to control it, in particular in the presence of floating markets. Our initial concern was that of asserting the credibility of our institution, in particular in the fight against inflation, but we did not have to do it, because inflation has remained moderate. That is why, looking back - and I would not like to look flattered by it -, considering the problems of exogenous shocks we have had and the problems we still have due to our internal non-flexibilities, mostly on the front of jobs, I believe that the euro has been conducting itself quite remarkably.
Mr Mundell, somebody considers you the father of the euro ...
MUNDELL - Thank you; but I would like to introduce a new element: to look ahead to, more than to just think of, the need to move on towards a global currency. I realize that many people may react to this with a smile. But they are the same that were smiling when we started talking of a European single currency, which would have kept together under the same umbrella Germany, with a growth of 2%, and Ireland, with a growth of 11%. There were still several currencies in circulation when the euro was introduced. But the floatings ceased pretty soon. Today there are 200 different currencies in the world, why not to do the same?
But doing that at the global level ...
MUNDELL - I have a plan: we start with the three great world currencies, the dollar, the euro and the yen; the currency will be given the name DEY; in a second stage, also the pound and the yuan can be added. We will have, then, a basket of five reference currencies for the 200 different currencies. Each area will dampen the floatings within the basket. I also anticipate that there will be a role for gold. Unless we can assume that there will be a century of global peace in our future, gold will play an increasing role. On a technical plane, an agreed platform will be needed, that shall regulate the compensation mechanisms with the help of the International Monetary Fund, or better yet through a Council for world stability in the interest of everybody.
* Professor of Economics at Harvard University and President of the National Bureau of Economic Research
** Member of the Executive Board of the European Central Bank
*** Professor of Economics at Columbia University, 1999 Nobel Prize Laureate