Monetary Power and Monetary StatecraftInternational Monetary Power by David M. AndrewsReview by: Yakub HalabiInternational Studies Review, Vol. 10, No. 1 (Mar., 2008), pp. 100-102Published by: Wiley on behalf of The International Studies AssociationStable URL: http://www.jstor.org/stable/25481934 .

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International Studies Review (2008) 10, 100-102

BOOK REVIEWS

Monetary Power and Monetary Statecraft

Review by Yakub Halabi

Department of International Relations, University of Haifa, Israel

International Monetary Power. Edited by David M. Andrews. Ithaca: Cornell University Press,

2006. 224 pp., $35.00 (ISBN: 978-0-8014-4456-2).

International Monetary Power, edited by David Andrews, uses a state-centric

approach to

explore issues surrounding "international monetary power," on the

one hand, and "monetary statecraft," on the other. International monetary

power can best be understood as a relational property, in which the behavior of one state

changes because of its monetary relations with another state. By

con

trast, international statecraft exists when one state consciously and deliberately

manipulates monetary relations in order to influence the policies of a second state. Thus, an adjustment of balance of payments disequilibrium by state A,

which causes state B to abandon preferred policies, is an example of monetary

power. Efforts by a state to promote the external use of its currency generally

or

to manipulate its currency's external value are

examples of monetary statecraft.

An interesting point regarding monetary power is that political control over

domestic policy is not always in the hands of the national government, which it is widely presumed to be. States may, for example, subordinate their domestic

monetary policy to another state, as was the case for Austria during the 1970s

when it decided to subordinate its monetary policy to the German Bundesbank

(p. 203). Monetary power also explains the desire to create a currency area, like

the European Monetary Union, in order to eliminate the "wedge-effect" by which fluctuations in a strong currency (the US dollar) affect weaker (European) currencies asymmetrically (p. 131). By creating

a currency area, European finan

cial assets and European trade can be denominated in euros rather than dollars

(previously the only international currency). In addition, establishing

a currency area may divert trade and strengthen private

sector coalitions. With respect to

monetary statecraft, the United States has been able to use the exchange rate

as a weapon in the post-World War II era to force policy adjustments by its

economic partners because they have been vulnerable to changes in their

currencies' exchange rates vis-a-vis the dollar.

The existing international political economy literature, as the contributors to

International Monetary Power argue, provides very little direction regarding the

exact route that adjustment will take or how the cost of adjustment will be paid in the case of balance of payments disequilibrium. After all, each country "pre fers the others to adjust their policies and is averse to changing its own, with a

shift in exchange rate lying between these two alternatives" (p. 119). Thus, Andrews claims that international monetary relations have an

inherently compet

itive dimension, which is "likely to be decided on the basis of power" (p. 13).

Benjamin Cohen claims that the distribution of the transitional cost of adjust ment, which refers to the capacity of a state to pass on the transitional cost of

? 2008 International Studies Association. Published by Blackwell Publishing, 350 Main Street, Maiden, MA 02148, USA, and 9600 Gansington Road, Oxford OX4 2DQ, UK.

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Yakub Halabi 101

adjustment to its economic partners, is "up for grabs." On the other hand, the

power to delay the continuing costs of adjustment depends

on a state's monetary

capacity, such as its international liquidity position, which encompass both for

eign reserves and access to external credit. In Cohen's view (p. 31), a

powerful state can postpone the adjustment of its balance of payments (power to delay), or it can pass on the transitional costs of adjustment to its partners (power to

deflect). The question, nonetheless, is to what extent states obey rules that regu

late interstate monetary relations and prescribe behavior, rather than succumb

ing to power relations. Answering this question, Eric Helleiner (p. 76) points out that the stronger state sets the framework in order to make the outcome congru ent with its preferences,

not as a direct attempt to control the behavior of weaker

states.

The power to delay or deflect can, however, turn into a

self-defeating strategy that may weaken the government's long-run global position in three ways. First, at the domestic level, a chronic accumulation of debt means that servicing these

debts in the future will absorb more of the national savings, which may reduce investment and lower productivity. Second, exercising the power to delay in effect passes the burden of payments to the next generation, which reduces its

ability to compete effectively. Third, with regard to the power to deflect, Cohen

ignores the shadow of the future. As Randall Henning suggests (p. 118), deflect

ing costs onto one's partners may encourage the latter to shield themselves

against future monetary coercion by creating a

monetary union. At a minimum,

cooperation in the future is contingent on cooperation in the present. In this

regard, Andrew Walter is right to claim that there are two prerequisites for suc

cessful monetary leadership: conservative macroeconomie policy and domestic

institutions that foster the emergence of a highly developed financial system. "In the long run," Walter asserts, "the persistent exploitation of monetary power

[by the leader] may undermine the foundations of the currency leadership itself (p. 52).

Cohen also raises the interesting point that power is not only the capacity to influence others, but also the capacity to not allow others to influence you. It is, in short, the ability

to exercise policy independence. When a state runs an unsus

tainable payments disequilibrium or is unable to service its external debt (a situa tion that is typical for many Third World countries), it risks its policy independence. As a result of their debt crises, many developing countries were forced by the International Monetary Fund and the Paris Club to

implement a

structural adjustment program that was aimed at depoliticizing the economy,

which prevented these states from using their financial resources to promote

industrialization, and at creating a level playing field between developing and

developed countries in world trade, which means unfair trade from the point view of the developing countries.

One major problem that the contributors to International Monetary Power face is

how to distinguish between behavior that results from the exercise of monetary

power (direct influence attempts) and behavior that results from the exercise of

monetary statecraft when that statecraft contains an intentional dimension. Fur

thermore, the contributors do not explain the conditions under which a power

ful state will or will not refrain from translating its monetary power into

monetary statecraft. In other words, why would a powerful state refrain from

deliberately using its monetary power to ensure that another state will change its behavior in accord with the powerful state's preferences given that?under the

assumptions of relational power?the weaker state may not always be swayed to

change its behavior in the desired way unless the powerful state exerts it power in a more direct fashion. On the other hand, the contributors do argue that

monetary power faces many impediments, such as the difficulty of directing currency manipulation against a particular target. These impediments limit the

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102 Monetary Power and Monetary Statecraf

efficient exercise of monetary power as a deliberate instrument (p. 25) and make the use of monetary threats less attractive than other forms of economic

coercion.

Finally, the contributors to International Monetary Power devote little attention to the effect that economic globalization has on monetary statecraft. Indeed,

Jonathan Kirshner claims that financial globalization is neither novel nor irresist ible (p. 140). Yet, assuming that most states have adopted a floating exchange rate system and allow the free movement of capital (such that the realignment of exchange

rates is market driven), to what extent can one state deflect the

onus of adjustment onto its partners? The flexibility of exchange rates and the free movement of capital make states, especially small states, much more vulnera

ble to economic shocks from abroad. For instance, a financial crisis in one state

creates almost immediate contagion effects in other states, which puts economic

pressure on the latter for policy adjustment. Under these circumstances, emerg

ing markets or small states with high risk premium to their bonds will be the first to suffer from the sudden outflow of capital. This scenario points to the fact that relational monetary power is more

prevalent than monetary statecraft, given eco

nomic globalization. Finally, because it employs a state-centric approach, Interna

tional Monetary Power ignores how the policy of one state affects the domestic interest groups within another state. Such effects are potentially important parts

of the story, however, given that these groups put pressure on their government to carry out adjustments.

Overall, International Monetary Power is a theoretically ambitious study that will leave readers with a nuanced explanation of monetary power and monetary state

craft. More concretely, it provides an articulate realist explanation for Europe's

eagerness to create a monetary union, which will presumably allow the euro to

counterbalance the dollar.

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