As the Group of 20 meets to seek common ground on protectionism, this year’s euro crisis will hover over their deliberations. The crisis that erupted in Greece has again exposed the fragility of a key element of currency-pooling arrangements: the important value created by a pooling of interests tends to be distributed disproportionately in favour of the financially less collegial members of the pool. Thus, unless restrained, too often, some members will try to exploit their advantage, as Greece brazenly did in recent years.
The restraint imposed on the euro area by the stability and growth pact was supposed to limit euro-denominated sovereign borrowings. The pact, confronted with its first big test in 2003, failed. The cumulative consequences of the failure emerged this year as a fiscal crisis in Greece and other euro members. The benevolent mood accompanying the creation of the euro was nowhere to be seen.
Fortunately, threats to European monetary union, so far, have been successfully fended off by the herculean actions of the European community assisted by the International Monetary Fund. Currency problems have now spread to the global financial system which, like the euro area, requires adherence to certain rules to sustain it. It is not only the well publicised friction between China and America – both may be right about each other – but also by the drive for competitive export advantage through currency manipulation in a world where a zero global current account balance permits none.
