Year XXX, 1988, Number 1, Page 6
Ecu and Rouble: towards a New International Monetary Order
Towards a multipolar international monetary system.
Experience over the years following the end of the Bretton Woods monetary system has shown quite clearly that floating exchange rates do not in fact give the individual states that greater autonomy in the conduct of monetary policy which was apparently sought by abandoning fixed exchange rates.
Indeed, economic activity has become even more interdependent, while unstable exchange rates and incompatible economic policies have produced grave uncertainty on the financial markets and in businessmen’s investment decisions, inefficient resource allocation, slow growth and high unemployment. Even the successful control of inflation, once regarded as a sufficient condition for stabilizing exchange rates, has not restored balanced economic and financial relations among the various countries as desired.
Whereas more recent attempts to reach international agreements on exchange rate stabilization must be applauded as showing a common desire for greater stability, they do not remove the need for a new international monetary order, for a system with unanimously recognized rules and institutions capable of preventing or minimizing new disequilibria.
The answer is not to re-create a system such as that set up at Bretton Woods, for in the meantime worldwide economic and political changes have profoundly altered the entire scenario. In particular, the paper dollar standard, i.e. the institutionalization of the dollar’s role as the central currency of the international monetary system, which was so well suited to the needs of the postwar world economy, no longer seems at all capable of ensuring stable exchange rates, but neither could any other system based on a leading national currency. Moreover, if we look at the way in which world commercial and financial relations have evolved, it is impossible not to remark a strong trend towards polycentrism in recent years: the importance of the US economy has declined, that of the Japanese economy has increased, while at the same time new monetary and commercial areas are emerging and developing at a faster pace than previously thought possible.
A new international monetary system that did not take account of the changed situation would have little hope of effectively ensuring greater stability and growth throughout the world. It is essential, therefore, that it. should embrace different commercial and monetary areas and be equipped with mechanisms and institutions designed to ensure that each area participates according, among other things, to its economic weight in the world. From this point of view the only practicable medium-to-long term course is to create a new monetary point of reference, such as the Special Drawing Right, but redesigned to take account of the different regional monetary situations that are arising.
The example of the European Monetary System, which was adopted in order to restore stable monetary conditions in Europe, is proof that practicable solutions do exist and that implementing them on a world level, after the necessary adjustments, could be an excellent starting point for a reorganization of the entire system.
The sort of agreement needed should provide for the participation not of the individual currencies but of the different monetary areas and should initially employ a similar range of instruments to the European Monetary System, i.e. a) exchange rate agreements among the currencies of the area with fixed parities vis-à-vis the Special Drawing Right, b) compulsory intervention by participating central banks, c) provision for facilities among central banks.
During its initial stage, a system of this kind might incorporate a limited number of monetary areas (for instance dollar, ECU and yen) and subsequently be gradually extended, as economic and financial conditions permitted, to other areas (such as COMECON, Latin America, Africa). Until these areas achieve a proper monetary identity of their own, using the European currency could be a valid alternative to the generalized use of the dollar for commercial and financial purposes, as well as a reference point for the creation of their own monetary system.
A particularly interesting case is that of the COMECON, partly in relation to the present reform plan and partly because of the close economic relations it has always maintained with Europe, relations which at times have been the most dynamic element in all world trade.
The political and economic debate that has developed in recent years around the question of reform has led to two conclusions: a) that the Socialist countries cannot, in the medium-long run, tolerate their exclusion from a monetary system in which they participate in practice, not least because of increasing economic, scientific and technological relations with the West; b) that the link between the Socialist and the Western economies stands in need of structural reforms, involving small and great changes in the system and improvements that must necessarily be gradual.
With regard to the first point, there can be no doubt that the dollar has been — and still is, although to a lesser extent — an important monetary reference point for the Socialist economies as well. However, the recent switch to ECUs for invoicing East/West trade does indicate a willingness to diversify into a more stable currency. So far this aspect has mainly concerned exports of manufactured goods by European countries, in particular Italy, to the USSR. Yet a raw material exporter such as the USSR, already affected by wide market fluctuations, does not need the further aggravation of exchange rate movements. It is possible, therefore, that there will be a further currency diversification on the export side as well. Furthermore, in the particular case of the USSR, the desire for stability as an exporter is compounded by its concern as a creditor, with a large volume of claims vis-à-vis developing countries.
As far as the second point is concerned, that is a need for structural reform in the East European countries, one of the most fundamental problems is that of the convertibility of the individual national currencies and the area’s common currency, the Transferable Rouble. The convertibility problem, which we shall discuss further on, is a highly complex matter, for some time it has been at the centre of a lively debate and has been discussed repeatedly by the member countries and institutions of the COMECON.
Monetary integration of the area: the Transferable Rouble.
In order to fully comprehend the present problems and strategies of the COMECON it may be useful to recall briefly the phases in its monetary development.
The first decisive step towards better economic and monetary integration within the COMECON was made in 1964 with the introduction of a collective currency — the Transferable Rouble — and the creation of a central organization — the International Bank for Economic Cooperation (IBEC) — whose main functions were to supervise the system of multilateral settlements within the area and grant medium-long term loans to member countries.
The Transferable Rouble and the IBEC were created in response to a specific need to replace the bilateral clearing system and relative unit of account — the so-called rouble clearing — which had been in use since 1945 and which had raised several problems, above all due to its limited functions. The innovation adopted in 1964 was designed to do away with the disadvantages of bilateral settlement and at the same time create favourable conditions for credit granting and setting up reserves.
Unfortunately, the process of multilateralization has proceeded very slowly and with great difficulty. The role of the Transferable Rouble has gradually increased nonetheless and it is now employed in economic relations of all kinds between member countries — trade, settlement of services, credit granting. Despite many persisting defects it performs all the functions of a currency: store of value, reserve instrument, means of payment.
It should be recalled that a currency unit is only a store of value if it expresses the price of goods and services. Prices in Transferable Roubles are deduced from world market prices in the various currencies. However, since the individual currencies are often subject to wide fluctuations — which runs against a planned economy’s need to keep prices stable — a system for calculating prices in Transferable Roubles has been developed based on the average world prices for each good over the preceding five years. The average thus obtained minimizes the effect of cyclical fluctuations (upward or downward) without altering the long-term trends of world prices. In this respect one could say that in the system of price formation within the COMECON the rouble is a fairly independent store of value, although linked to a group of currencies which measure the value of goods on world markets.
As a reserve currency too, the Transferable Rouble has certain specific features. This role derives from the granting of bilateral credits in the common currency by one country to another within the COMECON by means of transfers to accounts with the IBEC. The loans in question are conditional on the lender having reserves in Transferable Roubles resulting from a surplus of export revenues over outlays for imports. Reserves in Transferable Roubles accumulated by all participating countries to a programme also constitute the basis for multilateral credits granted by the IBEC and International Investment Bank.
The convertibility problem.
In its role as a means of payment the Transferable Rouble still has many shortcomings, although it is nonetheless widely used for payments within the area. A currency ought to represent a generalized purchasing power; that is to say, its power should be closely linked to the freedom with which the currency can be spent. The fact that the Transferable Rouble is not “basically convertible” — i.e. the possessor of a financial surplus with the IBEC is not free to use it to purchase goods and services in one of the countries of the area — is perhaps the main obstacle which the Socialist countries will have to overcome if they wish truly to internationalize the rouble and ensure its more effective use within the COMECON.
The basic problem is that the purchasing power of the Transferable Rouble is limited by the rigidity of the market and by the relative shortage of certain goods, not by defects in the monetary unit itself. It would, in fact, be more correct to describe a country as having “basic inconvertibility” than to say that a given currency is inconvertible: that inconvertibility applies not only to transactions in Transferable Roubles but also to those in convertible currencies because Western firms are unable — even using convertible currencies — to negotiate directly with the COMECON partners and obtain the goods they want.
This type of inconvertibility largely depends on the planning system, which does not permit purchases and sales that are not regulated by the plan and so impedes widespread use of the Transferable Rouble in transactions with third countries, as well as preventing the proper operation of the mechanisms set in motion by the creation of the system.
In order to achieve the “basic convertibility” of the Transferable Rouble — and of the individual currencies of the area — radical economic reforms must be enacted to rid the present planning system of its rigidities and of the problems caused by a distorted price structure not linked to the world market.
An easier and more immediate objective would be to achieve “monetary convertibility”, that is the possibility to change a currency such as the Transferable Rouble or one of the individual national currencies into another currency within or outside the area.
In the past there has been much discussion about the possibility of an “external” convertibility of the rouble, only applying to settlements of East-West trade and not within the COMECON. This position has now been completely abandoned for two reasons: the first is that external convertibility depends on the level of international reserves, and at present those of Eastern Europe are certainly inadequate; the second is that the solutions now sought are those which will also guarantee greater economic or monetary integration within the area.
This is not to say that a policy geared to achieving external stability as well will not be pursued. It will, however, run parallel to internal convertibility — of the Transferable Rouble against the currencies of the area and among the latter.
The problem of the integration of the COMECON has been the focus of action for many years, although results have not always been proportionate to the efforts made.
The prospective convertibility of the individual national currencies — Russian rouble, Hungarian florin, Czechoslovakian crown and so on — must be regarded as a positive development, so long as it is not intended to replace the convertibility and more widespread use of the Transferable Rouble.
On the other hand, it should not be forgotten that the desire to employ an international monetary unit in economic relations which is independent of the monetary power of a specific country but which has as stable as possible a purchasing power is the reason why in 1964 the COMECON countries created their first embryonic common currency.
Furthermore, on several occasions since the introduction of the new system based on multilaterality, emphasis has been placed on the central role of the Transferable Rouble in the COMECON’s monetary and financial system. The 1971 “Global plan to strengthen and improve cooperation and integration among the Socialist economies of COMECON member countries” represents a major step in this direction. On that occasion, the Transferable Rouble was defined as “the collective Socialist international currency of the member countries” and was to be the object of a series of measures designed to increase its use in multilateral payments and payments to third countries, to make it convertible with the other COMECON currencies and to make the IBEC the centre which would ensure the rouble’s convertibility.
Although little has been achieved in this direction since then, the basic strategy remains unchanged and may even be relaunched in the present reform plans.
It is in that direction, therefore, that efforts must continue, for it is probably the only route to a “neutral” solution for the countries belonging to the area. What must be avoided is an easy relapse into exclusive use of national currencies. If this were to happen the COMECON countries would, in some respects, be moving backward along the road covered by the Western countries, and the European Community in particular, in recent years. It is essential that they should exploit the advantage of having realized at an early stage the need for monetary integration, that is for a common currency and common institutions.
The danger of relapsing into the use of national currencies became fully apparent at the last meeting of COMECON countries held in Havana last December, during which a general arrangement emerged among some of the countries to sign bilateral agreements designed to facilitate use of their national currencies. It is interesting to note, however, that many countries responded to this tendency by declaring their support of a common currency whose convertibility vis-à-vis the individual national currencies would be an effective means of restoring appropriate monetary relations within the area.
The need for reform.
In the medium-to-long term the COMECON countries will have to pursue the objective of full convertibility of their common currency. This is the premise for effective world-wide use of the rouble. History teaches that such convertibility makes currencies “stronger”: for example, when, after World War II, the Western currencies were declared financially inconvertible, the subsequent depreciation was limited by the fact that they could nevertheless be exchanged for goods. It is evident that in order to achieve full convertibility some profound reforms are necessary to link domestic prices more closely to world market prices and to bring them more into line with the cost of the resources employed.
A number of steps are being taken in this direction: in the USSR for example, the resolution of the Plenum of the Central Committee of June 1987 has set economic reform in motion by calling for a reorganization of finances, credit and monetary circulation. It provides for a thorough reform of prices, with the abolition of subsidies for agricultural product prices and tariffs and with wage increases. Similar reforms have been enacted in Hungary, while Czechoslovakia has decided to unify the exchange rates of the crown, previously set at different levels for different categories of imports.
The start of a period of increased competition among firms of East European countries could lead to a greater propensity to innovate, which in turn would reduce the dependence on the West and improve export opportunities. This would be an excellent result, not only in terms of improving the efficiency of the economy of the whole area but also because it would tend to bring the balances of payments into equilibrium and so speed up the process of making the individual currencies and common currency convertible.
EEC-COMECON monetary co-operation.
There is a basic similarity between the experiences which the EEC and COMECON are undergoing at present: despite having started from highly divergent political, cultural and-economic positions, both areas are seeking forms of integration that can ensure greater stability and lasting growth. Although in some way the European Community has covered more ground in this direction, there can be no doubt that for the COMECON countries, especially those with a narrow market, the enlargement of their internal market is a priority and an essential condition for restoring equilibrium in their economies and their financial positions.
In the pursuit of greater economic integration money becomes an essential element: the ECU and the Transferable Rouble could play a truly unifying role alongside the national currencies of each area. And the creation of a link between these two monetary units would boost mutual co-operation and help the COMECON common currency to achieve full convertibility more rapidly.
From this point of view it is to be hoped that agreements will be reached — even on a bilateral basis initially — between the EEC countries and the COMECON to provide for increased use of the ECU in the settlement of trade and the start of use of the Transferable Rouble. This possibility — which the IBEC envisaged in 1972 when the so-called “Basic principles for settlement in Transferable Roubles” were adopted — could become reality with the application of an initial form of convertibility between the COMECON currency and the European currency. This convertibility could be guaranteed by the creation of reserves in ECUs obtained from exports invoiced in the European currency.
A next step might be to establish an exchange rate for the ECU vis-à-vis the Transferable Rouble. Explicit agreements on this point between the monetary authorities of the two areas, including rules for intervention to defend the desired parity, would act as a considerable incentive to Western firms to do business with the COMECON countries and would help the latter in the formulation of plans relating to foreign trade.
Measures such as these, designed to create a monetary link as the basis for greater economic integration, could well be adopted in the short term. They would be relatively easy to apply since considerable similarities already exist between the composition of the EC§U and currencies used in trade between the two areas.
The time now seems ripe to begin further moves towards strengthening co-operation between the common monetary institutions of the two areas, which already possess similar features. Like the European Monetary Co-operation Fund (EMCF), the International Bank for Economic Co-operation (IBEC) is in some way at the centre of the system; in both cases the regulations governing their activity provide for the granting of credit to finance balance of payments disequilibria. Along similar lines to the European Investment Bank (EIB), the International Investment Bank (IIB) manages a special fund to finance economic and technical aid to less developed countries. Lastly, both areas possess a multilateral clearing system, albeit with large differences.
There are many steps, in addition to those outlined above, which could be taken in this sphere to increase monetary co-operation between the two areas.
For instance, the countries belonging to the European Community could become members of the IBEC, which contemplates this possibility in its Statute. In turn the COMECON bank (IBEC) as well as the individual East European central banks could apply to the EMCF for status as “third party holders”, as envisaged in the EMS agreements, and obtain official ECUs from the EEC central banks with right to the same return as the Community central banks.
In addition, the banks of East European countries with branches in the EEC could, by Statute, become members of the ECU Banking Association — an organization embracing over 80 banks operating within the Community as well as the European Investment Bank itself, which supervises the ECU clearing system. Indeed, once certain requisites for admission have been fulfilled, such banks could even become clearing banks, a possibility envisaged by recent extension of the system to non-EEC banks.
An initial bond between the two monetary systems which would in some way bring the Transferable Rouble into contact with the ECU would help to ensure that trade within the COMECON develops in line with world market trends, a prerequisite for more decisive steps towards “convertibility”.
In this perspective it would be possible, and desirable, to strengthen the monetary links between some of the COMECON member countries and the EMS. Far from becoming centripetal forces, such measures would pave the way for closer future co-operation between the two systems and would allow countries such as Hungary, in particular, to perform a specialized role as a financial centre. These are well-known problems, however, even within the European Community, where the member countries participate in different ways in the European Monetary System.
What needs to be done is to redefine the COMECON monetary mechanisms in order to adapt existing institutions to the new lines of growth of the economy recently adopted by the USSR and other member countries; this, in fact, would also provide the opportunity to take part in the process of reform of the international monetary system under agreements with the countries belonging to the European Monetary System. It might also offer a chance to rename the “Transferable Rouble” making it more supranational, as happened with the ECU, which was introduced under the agreements setting up the EMS in December 1978.
European unity to strengthen international co-operation.
It may be worthwhile to emphasize that the measures outlined so far, all seemingly easy and quick to implement, in reality demand considerable determination as well as sound institutional organizations.
As we move towards a phase of increasing monetary pluralism, Europe’s role becomes of crucial importance: progress towards more advanced forms of economic, monetary and political unity is a necessary condition in order to be able to experiment with wider forms of international co-operation. It is the Europeans who must become an example and a driving force in creating the first organized forms of management of the world economy.
European economic unity, for which 1992 is the deadline, would be given a sound boost by the achievement of monetary unification, the decisive step towards which is to consolidate the European Monetary System by creating a federal European bank to which the individual governments delegate the management of the common currency.
Sounder relations within the area, guaranteed by a central organization for the management of the currency, are essential in order to initiate a new cycle based on economic growth, increased employment and more stable relations with other areas.
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 At the beginning of the 1970s, for instance, many problems arose concerning medium and long-term credit operations by the International Investment Bank because the countries which received the investment loans had difficulty in purchasing, in exchange for Transferable Roubles, technical materials not specifically covered by the bilateral agreements.
 Until now the objective of maximizing the growth rate of national income through faster capital accumulation had prompted these countries to keep raw material prices relatively low and machinery prices relatively high. This distorted structure of relative prices had, on the one hand, concentrated resources in the hands of machinery and plant producers and, on the other, encouraged wastage of primary resources and discouraged technological innovation because of the consequent lack of incentive to innovate.