Introduction:

The paper is organised as follows. The next section is devoted to a brief description of Keynes’s original proposal of a regime of fixed exchange rates and some more recent developments by Post Keynesians. Our criticism of Keynes’s and Post Keynesian schemes for the adoption of fixed exchange rates is that they fail to pay due attention to the importance of capital movements in the determination of exchange rates. Instead, these reformist proposals tend to concentrate on current account imbalances. We argue that these schemes implicitly adopt a notion of money essentially seen as a mere medium of exchange. We regard this notion of money as unsatisfactory.

On the grounds of our critique of the notion of money that underpins the predilection for a fixed exchange rates regime, in the following section we expound our alternative approach to money, based on the notion of currency sovereignty. We hold that this approach to money is not only consistent with a Post Keynesian analysis of the international economy but it also derives from Keynes himself, though from his Treatise on Money. As currency sovereignty implies the ability of a country to implement monetary and fiscal policies independently, we argue in section 4 that it is necessarily contingent on the country’s adoption of floating exchange rates.

In section 5, we briefly look at the Argentinean and European recent experiences. We take them as telling examples of the high costs of giving up sovereignty (Argentina and the European countries of the European Monetary Union, EMU) and the benefits of regaining it (Argentina). In both cases, extreme forms of fixed exchange rates were adopted to provide more stability to the economy. Argentina chose a currency board based on the US dollar; some European countries adopted the euro as their single currency.

In the case of Argentina, when the currency board was abandoned after its deep economic crisis, the country regained its sovereignty and could take policy initiatives to promote growth and employment. In the case of Europe, the adoption of the euro by twelve countries gave rise to the creation of a currency area that is comparable in size to the US. However, unlike in the US, within the Euro area there is no adequate European authority to operate fiscal policy that could complement or counter the European Central Bank (ECB) – as the US Treasury is able to do within the US. The ECB fixes a unique interest rate and influences the euro’s exchange rate with the other international currencies. This form of economic architecture is viable only to the extent that individual European countries subject themselves to strict fiscal constraints (the Maastricht Treaty) while they, of course, have lost any possibility to implement autonomous monetary policies or to control capital movements across borders.

This has produced, in our view, an intrinsically deflationary environment in Europe. A regime of more flexible exchange rates could have likely produced a more viable and dynamic European economic system, in which each individual country could have adopted and implemented a mix of fiscal and monetary policies more suitable to its specific economic, social and political context. Alternatively, the Euro area will have to create a fiscal authority on par with that of the US Treasury – which means surrendering national authority to a central government, an unlikely possibility in today’s political climate. Section 5 concludes by pointing out some of the advantages of having floating exchange rates but also by stressing that such a regime should not be regarded as a sort of panacea. It is a necessary but not sufficient condition for a country to retain its sovereignty and the power to implement autonomous economic policies, but it is not a sufficient condition to guarantee that such policies be actually aimed at providing higher levels of employment and welfare.