After the Euro

There’ll never be a digital Euro, but there will be digital replacements for the Euro

It looks as if the number of currencies in the world is set to go up again. Across the English Channel, satisfaction with supra-national monetary policy is waning and the leader of the French right is setting out her vision for future monetary arrangements:

[Marine le Pen] said she could see the EU setting up another currency like the ECU, or European Currency Unit, which the bloc used for internal accounting purposes before the euro was introduced in 1999.
From China Media Warn Trump of ‘Big Sticks’ If He Seeks Trade War — Bloomberg

Now, younger readers may be unfamiliar with the ECU, but I’ve written about it more than once before and I’m rather in favour of its reincarnation in a modern fashion because the idea of restoring the Franc (and other national and regional currencies) while simultaneously creating a new pan-European currency to support trade and tourism actually makes sense. Which makes me wonder if Marine got hold of the draft manuscript for my forthcoming book “Before Babylon, Beyond Bitcoin: From Money We Understand to Money That Understands Us” that the good people at the London Publishing Partnership have agreed to publish in June.

Since Marine has let the cat is out of the bag, I may as well give you a sneak preview. Here’s an extract from the book that explains why Marine’s call for something like the ECU is not a bad idea at all.

I remember hearing the Chancellor of the Exchequer talking on the radio during the great financial crisis. He referred to the difficulties of currency union and spoke about the problems in Ireland, Greece, Portugal and Cyprus. He spoke about the problems of maintaining monetary policy across currency unions between economies with different fundamentals. All true. But he didn’t explain why this is different to the UK. How is the insanity of trying to maintain a currency union between Germany, Luxembourg and Greece any different to the insanity of trying to maintain a currency union between England, Wales and Scotland? The fact that they are in a political union does not alter the facts on the ground: they have fundamentally different economies. The Chancellor argued that if Scotland opted for independence, it would be impossible to maintain a currency union between England and Scotland. But surely that is true now! The best monetary policy for England is not necessarily the best monetary policy for Scotland, and technology means that what was optimal for commerce at the time of the Napoleonic Wars may no longer best for the modern economy.

If the argument for currency union is only about transaction costs within economic zones, then former Chancellor of the Exchequer John Major set out a potential way forward in 1990 (although the idea dates from 1983) with his alternative to the euro, which was at the time was labelled the “hard ECU”. The ECU was the “European Currency Unit”, a unit of account set using a basket of currencies, that was intended to help international business by minimising foreign exchange fluctuations. Major’s idea for the hard ECU was a fully-fledged currency with a “no devaluation” guarantee. Whereas the ECU reflected the weighted average of inflation rates in the countries concerned, the hard ECU would be linked to the strongest currency (which would have been the Deutschmark, of course). This guarantee would be backed by a commitment from participating central to buy back their own currency or make good exchange losses in the event of devaluations.

Imagine what that kind of parallel currency might look like today. It would be an electronic currency that would never exist in physical form, but still be legal tender (put to one side what that means in practice) in all EU member states. Thus, businesses could keep accounts in hard ECUs, even in a post-EU England, and trade them cross-border with minimal transaction costs. Tourists could have hard ECU payment cards that they could use through the Union without penalty and so on. But each state would continue with its own national currency (you would still able use Sterling notes and coins in British shops) and the cost of replacing them would have been saved.

The reason for doing this is to minimise the costs of doing business across Europe while giving each country control over its own currency. But the more general point that I want to make is that the advance of technology gives us new choices in the way that money works. The way that money works now is not a law of physics: it is a set of institutional arrangements that could be changed at any time. Thus, if anything, Ms. le Pen is not being radical at all. Why have nation-state control over money? Why not allow regions to have their own currencies? Why not use Google Money? Or Islamic e-Dinars?

I’m not the only one who thinks this, by the way. Check this out from “The Futurist Magazine” in September 2012, where as part of a compilation of pieces envisioning life in 2100, the article asks if we will still have money in 2100, and speculates on what form it may take if we do:

It is quite likely that we will still have money in 2100, but it may not be issued by governments any longer.
[From Publications — The European Futures Observatory]
Government cash? Bank cards? Cryptogtaphy? Corporate Chips?

I couldn’t agree more. But if not governments, then who? One of the things I discuss in my book is my “5Cs” categorisation for thinking about the future issuers of money: central banks, commercial banks, companies, cryptography and communities.

My good friend Rob Allen, from PwC, was kind enough to use this model in Sydney last week and, frankly, if people like Rob are taking it seriously then I know I’m on the right track.

Great vision for 2025 banking from Rob Allen @PwC_AU at #blockchain summit Sydney with @dgwbirch ‘s great succinct diagram of 5 C’s of value
— Tim R. Lea (@TimothyLea2)
February 22, 2017

Here’s a taxonomy fittings those 5Cs into a broader landscape to help me to develop my thinking about about the potential evolutionary paths. I won’t give away the ending of the book just yet, but let me just say that I rather agree with the former governor of the Bank of England, Mervyn King, who said in his recent book The End of Alchemy that “although central banks have matured, they have not yet reached old age. But their extinction cannot be ruled out altogether. Societies managed without central banks in the past”.

Thinking about Money.

It’s time to start thinking about the future of money and not just because people are speculating like crazy with Bitcoin or because I have a book about it coming out in June (did I mention that before?) but because the current industrial age monetary arrangements do not support the post-industrial economy.

[An edited version of this article was first published on my blog In the future, everyone will be famous for fifteen megabytes.]