The Euro and the Unofficial Dollarization of Ukraine
The year 2001 ended with two events in the world economy that, although unconnected at first glance, are of the same origin. One event can be called successful: putting the euro into cash turnover as a climax of the transition to a single European currency. The other event should be classified as a disaster: the economic collapse in Argentina, one of the largest states following the line of a free-market development.
Obviously, monetary policy is the common root of both events. Analysts now say that the decision to maintain a peso to a dollar fixed exchange rate at one to one (tantamount to introduction of the dollar as national currency) was the main cause of the Argentine collapse. Introducing the dollar as national currency is a step diametrically opposed to what was decided by eleven European states, which signed the Maastricht Agreement and set fixed exchange rates in 1999. By so doing, they agreed to introduce a new single currency based on common budget discipline. On the contrary, Argentina dropped its currency-related independence in favor of a powerful external stimulus capable of replacing a traditionally weak self-discipline. The lesson that should be learned from the Argentine internal events is that stimuli for discipline should be sought in the political will of the government of a country rather than outside its borders. Another characteristic feature of both events is the role played by the grassroots who, in Argentina, pressed the government into rejecting the international monetary system’s status quo, and, in Europe, resolutely supported its single currency, thus showing the whole world that the disadvantages caused by the introduction of new banknotes are insignificant compared to the expected advantages of a single European currency. In this case, the message is that the trust of most citizens contributes to success in monetary policies.
Lack of political will and trust on the part of citizens are precisely the factors that explain the paradoxes of monetary tendencies in Ukraine. Although the Ukrainian hryvnia reinforced its positions vis-а- vis the US dollar in 2001, it still remains a “weak spot” for everybody in Ukraine. Rich individuals, who make up a negligible minority, keep their savings in offshore bank accounts. As to the majority of Ukrainian citizens, they usually keep their small savings in greenbacks. Ukraine ended the year 2001 with a foreign trade surplus, which will especially boost the Central Bank’s hard-currency reserves. Moreover, inflation is under control. However, those who lobby the interests of exporters are already pressing for devaluation, and some reliable sources among government officials are already forecasting a lower rate this year. Ukraine is being unofficially dollarized due to public mistrust in both the nation’s currency and its monetary policy.
Contradictions in monetary trends are not confined only to the monetary sphere because cash paucity also reflects on the normal rules that govern relations between the monetary, fiscal and real sectors. The 14% discount rate officially set by the NBU in late 2001, eight points above the inflation rate, shows that the supply of money mass does not meet the requirements of the growing real sector. Obviously, Ukraine’s economic growth stems from the revival of some Soviet established industries, such as metallurgy, mechanical engineering, and chemical production. What could be the only positive result of this, provided there is a real transition to modern industrial structures, is reinvesting the profits in new sectors, for neither the underdeveloped financial sector nor the shortage of domestic savings make possible the application of this kind of mechanism.
It is quite obvious that unofficial dollarization is not a method to stabilize under the conditions of such an ill-considered monetary policy in the CIS states. Until recently, what seemed to be the only alternative in Ukraine was transition to official dollarization which involves currency boards and linkage to the US dollar. Two years ago, the Ukrainian-European Consultative Center already advanced arguments against any such decision. Meanwhile, the final stage of single European currency introduction that started on January 2002 allows resuming a broader debate on Ukraine’s monetary policy trends because our oft-mentioned European option is bound soon to aggravate contradictions between the desire to join the common economic and monetary space and to support the supremacy of the US dollar in the Ukrainian economy.
Our aim is not to propose some patent medicine to harmonize Ukraine’s pro-European intentions and monetary policy. We are convinced that the whole process should necessarily rely on an innovative approach (as well as introduction of the euro) and, therefore, it will be absolutely useful to conduct a broad debate on purely political and related technical problems. Moreover, our intention is to attract attention to the international consequences of euro introduction, which should become an additional incentive for this kind of discussion.
To fundamentally understand the projected value of the single European currency, it is important to remember that internalizing the euro is a dynamic market-oriented process which envisages no direct European Central Bank intervention to support or on the contrary to curb the international application of this currency. In this case, the market is the leading motive force, for the euro zone serves the largest portion of world trade, accounting for 15% of world exports (the US and Japan account for 15% and 8.5%, respectively).
For the likely worldwide users of the euro, the function of money as a financial instrument will be decisive for shaping the further destiny of this currency. It is possible to suggest even now that the market formed by integrating the national financial markets of the euro zone states will exceed the overall size of these constituent markets. The main cause of this expansion is the reduced cost of operations and a broader choice of financial instruments.
Another important and promising change is the euro’s performance on the international stage of monetary cooperation. By reducing the number of big-time payers, the introduction of the euro opens new prospects for cooperation in worldwide monetary policies. The euro’s introduction has essentially changed the situation inherited from the breakdown of Bretton Woods, opening up new opportunities for thwarting monetary crises and maintaining world stability.
Another factor making it possible to forecast major positive international consequences of introducing the euro is the upward dynamics of regional economic integration in the epoch of globalization. To approach the formation of a common market, any regional integration process needs a stable domestic exchange rate. The experience of the European monetary integration proposes a concrete alternative to a “unilateral monetary union” in order to achieve this kind of stability.
In the future, Ukraine is not doomed to economic isolation and monetary instability. One way or another, deliberately opting for regional integration, Ukraine will follow the example of European monetary integration and take advantage of the improved global monetary environment made possible by the introduction of a single currency.
