"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

Emerging Issues on the World Economy 323
to satisfy the lesser capital that is available from domestic sources. So, we had a
period of pretty sharp change in rate of exchange, and this was against the philosophy
of those who favored the exchanges.
Now, can one expect that some of the weakening of growth and trade really
can be brought back to the instability of exchange rates? This raises the issue of
what the future holds, how we should handle this, and what the hopes are for stabilizing
the exchange rates. No one wants to return to fixed exchange rates, having
experienced the freedom that comes from variable rates, despite all consequences.
A fixed exchange would have to rely on the key currency. It would be fixed
with respect to one currency and that currency would be the U.S. dollar. But Mr.
Lee has shown you that you should not rely on the U.S. dollar because the U.S.
can do erratic things, so in the long run you have to set a complicated system of
multiple reserve currencies or else essentially this is not a feasible thing.
Some believe that you can have a look at the future by seeing what has been
done in the past in Europe. The countries of the Common Market have essentially
decided that they were tired of moving up, down, and across. Remember
that in principle you have several countries. If the dollar fluctuates then the relation
between currencies will follow, because the rise in the price of the dollar will
differ from that of imported and exported goods.
And so what have they done? First they have formed a union, a custom union
which is coming to fruition any time now. It is in the process. Some questions
exist as to exactly when and where, but the union is aiming for a common currency
and they have established certain conditions to be fulfilled for countries to
join—conditions which are far from being met at the moment. One of these conditions
for entering the union is that the debt must not be higher than 60 percent
of GNP. But in Italy it is 110 percent whereas Belgium is very close to meeting
the standard. So it is difficult to go from 110 percent to 60 percent, no matter
what you do, unless you do not pay the debt, which I don’t advise. But the important
point is that, even with the move over the current cut, there have been many
years of fairly stable exchange rates. This provides a pathway to stability. Of
course you still have some instability with respect to a currency which is still
floating vis-a-vis that of the rest of the world. But you would have a strong stability,
acquired in this way.
This implied stability suggests that perhaps in the future there may be a tendency
to move towards more such groupings, because European grouping is itself
subject to much growth. Many countries, for example, Sweden and Switzerland,
have joined the system to get going again. In principle Eastern Europe might also
join. It’s quite a possibility, quite a range, so you have here a big block.
The United States, as you know, is negotiating a similar treaty with Mexico,
so that there would be an American Common Market which could then possibly