Monetary sovereignty

The project on monetary sovereignty, first, inquires how current institutional and normative frameworks of money and finance restrict or promote monetary sovereignty. Second, it aims to formulate policy proposals that may strengthen monetary sovereignty.  Monetary sovereignty in this project is understood as a principle that posits --  in an external dimension -- a certain autonomy of states to implement a monetary order free from coercion and requires – in an internal dimension – the democratic legitimation of a state’s or regional union’s monetary law and policy. Both notions – external autonomy and internal democratic legitimation – require further refinement as concerns their implications with respect to monetary law and policy. Such specification of the notion of monetary sovereignty constitutes a third objective of the proposed project.

Many analyses of the current ‘political economy of the world’ (David Kennedy) agree on the diagnosis that the currently prevailing varieties of capitalism and – less controversially and more acutely – the recent financial/sovereign debt crises threaten to erode institutions that are (still) closely linked with state sovereignty such as parliamentary democracy or economic and social rights. In the European Union executives agree on ‘rescue measures’ with limited or no parliamentary participation and fundamentally reshape the European Economic and Monetary Union through intergovernmental agreement, in particular the Treaty establishing the European Stability Mechanism. The tension within democratic capitalism (Wolfgang Streeck) -- between transnationally mobile capital and territorially bound democratic constituencies -- induces governments worldwide to enhance ‘competitiveness’ by flexibilizing labour, increasing protection of investors and reducing barriers to trade and investment by lowering taxes and ‘regulatory burdens’ of environmental or consumer protection standards. The resulting increase in societal inequality and precarious living conditions further threatens democracy by eroding its bases such as social cohesion and political agency of citizens.

While these observations concerning an erosion of sovereignty are widely shared what appears to be still lacking is a serious inquiry into the contribution of the institutional and normative orders of money to this state of affairs. It has become commonplace to assert that markets are legal constructs. Yet, much of the literature appears to accept current monetary institutions largely as a given. Reform proposals seldom question these institutions, but rather seek to strengthen state/democratic control through the regulation of economic activity such as banking or trough redistributive measures such as taxation (Thomas Piketty).

This project, by contrast, is based on the view that in order to better understand the current political economy of (democratic) capitalism and to make policy proposals to regain democratic control and promote equitable distribution we need to better understand the current institutional and normative order of money. Money appears as the necessary starting point as it constitutes the most immediate link between economics and politics -- between society and state. On the one hand money is the medium of the economic system (Niklas Luhmann). On the other hand the authority of the state to issue money has long been crucial to finance public expenditures. Money thus becomes the point of departure when examining ways not only to contain the self-destructive tendencies of the economic system (Gunther Teubner) but also to readjust state/society relations and to reclaim the power of politics over economics and technocratic expertise.

Such a project to reclaim monetary sovereignty must first acknowledge the institutional and normative variations in monetary orders. It must go beyond existing research on monetary law that reveal (often unreflected) ideological biases by positing that the operations of the institutions of money and finance are dependent on a specific institutional set-up as well as a particular normative framework under which central banks, credit institutions, financial infrastructure (e.g. payment systems) and markets operate (for an illustration of such research: Claus Zimmermann). It, thus, will be one aim to inquire into the varieties of institutional and normative frameworks of monetary order and to review the space these frameworks provide for policy initiatives by states as well as democratic participation in the shaping of such initiatives.

When examining the institutional and normative frameworks of money two dimensions will be of particular importance. The first is the transnational dimension of monetary law and politics. Monetary law and politics may be significantly shaped on the one hand by regional integration or cooperation through law -- within the European Union, a Euro Asian currency union, or among BRICS -- and on the other hand by the current geopolitical situation in which the US Dollar enjoys an exorbitant privilege (Barry Eichengreen) by functioning as global reserve currency and the Federal Reserve can clear the market of US treasury obligations. Against this background the project aims to focus on plans of developing a Euro-Asian currency union and a regulatory framework for financial transactions within BRICS, as well as attempts to establish other currencies than the US Dollar as international payment currencies.

The second dimension is the influence of technology on monetary and financial institutions, in particular payment and clearing systems. Technological advances in payments technology are often perceived as limiting monetary sovereignty, e.g. by making it more difficult to enforce capital controls or by strengthening the hegemonic position of the United States. In this project we intend to map the landscape of new (information and communication) technologies and their influence on the control of financial operations and to inquire how payment technology may be enlisted by states or regional unions to regain control over monetary affairs.

We envisage the following research areas to form components of the overall project:

 

Historically states issued money to finance their expenditures, e.g. to pay soldiers; increasingly, however, they have come to rely on private sector credit creation as well as government liabilities other than money and denominated in foreign currency to finance their expenditures. This development may be interpreted to significantly restrict monetary sovereignty. The project shall inquire into the legal construction of public finance, the role of central banks in this respect and alternative institutions that may enhance independence of public finance from foreign and private creditors.

In the current legal framework of Central Bank backed fractional reserve banking money is created in a public private partnership between Central Banks and commercial banks (Thomas Mayer). This money creation leads to financial instability increasing the likelihood of financial crisis and in turn the need for government intervention to provide financial assistance. With a view to strengthening monetary sovereignty the project shall examine alternative conceptions of money and credit and their legal construction.

Central banks are crucial institutions as their policies affect public as well as private finance. Through their standard and non-standard monetary policies they not only regulate the amount of credit, but may also steer investments into particular directions and – in case of the European Central Bank – increase or decrease the likelihood of sovereign defaults and (in concert with the other members of the Troika) exert pressure for structural defaults.

Yet these functions and powers are only to a very limited extent reflected in mandates, legal frameworks and accountability mechanisms of central banks. It will be the objective of the project to first engage in an examination of the existing institutional and normative frameworks of selected central banks, to inquire how they shape the political economy of and beyond money and finance and to identify institutional alternatives that may contribute to a monetary order which is not only more democratic, but also supportive of a sustainable real economy.

As stated above the project places a particular emphasis on the question how payment/clearing systems may strengthen monetary sovereignty and the role that technological progress may play in his respect. A number of initiatives shall be examined. These include the recent Russian legislation amending the law regulating payment (clearing) systems which, inter alia, aims to increase Russia’s monetary sovereignty and independence from the United States. Another initiative of interest in this respect is the Chinese International Payment System which shall promote the Renminbi as a global trading currency.

The project shall also address projects of regional monetary integration such as a single currency for the Eurasian Economic Union, which is currently being discussed by the governments of Russia, Kazakhstan and Belorus. In comparison with the European Economic and Monetary Union the project shall assess the implications of regional monetary integration for monetary sovereignty.