Background injustice

The idea of background justice was originally offered by John Rawls. According to Rawls, the main subject of justice is the basic structure of society, since one of the main aims of this basic structure is to secure just background conditions in which individuals and associations can make free and fair agreements.Footnote ⁸ Miriam Ronzoni has extended this idea to the global realm.Footnote ⁹ She argues that obligations of justice arise from specific types of interactions, since these interactions may raise problems of background injustice, or situations in which agents cannot interact as free and equal. This situation triggers the obligation to implement something similar to a basic structure – or supranational institutions that regulate these practices – when it is not yet in place.Footnote ¹⁰ At the global level, different forms of interactions between agents generate the need for institutions and regulation.Footnote ¹¹ According to Ronzoni in this context, just background structures should allow states to satisfy three conditions: sovereignty in their territory, social justice at home, and the ability to interact as free and equal agents.Footnote ¹²

To determine whether a system is fair, we should focus not only on abstract rules and institutions; instead, we should consider the conditions and informal rules in which the system operates, since the outcomes of a system will also depend on these background conditions.Footnote ¹³ This distinction between specific rules and the overall system, which includes background conditions in which these rules are embedded, was made by John Rawls on what he called a narrower and wider context.Footnote ¹⁴ For example, in a sexist society, a policy of quotas for women, when considered on its own, violates a principle of equality of opportunity, since it gives women priority over other candidates. However, when considering the system as a whole, with the informal rules and the position of women in society, this policy contributes to achieving equality of opportunity overall. In the context of a sexist society, a system that does not offer women any special privileges is unjust, since it contributes to maintaining the disadvantaged position of women in society. Rawls concludes that to evaluate the fairness of a basic structure, it is the whole structure that needs to be just, even if particular rules or institutions, when considered in isolation are not just.Footnote ¹⁵

Ronzoni extended Rawls’s idea of how the basic structure should be assessed to the global level. She observes that most of the issues that arise in the debate of global justice – for example, unwritten rules, noncoercive international institutions, ideas of differential treatment, and deep inequalities in bargaining power – are similar to the background conditions or informal rules of a domestic society.Footnote ¹⁶ In a domestic society, these informal rules are not part of the basic structure but are a crucial element to determine whether the basic structure is just. These background conditions do not tell us what the basic structure is but what should be regulated by it; hence, they are relevant even in the absence of a global basic structure.Footnote ¹⁷ In other words, these background conditions are constitutive of justice, since they are necessary to determine what constitutes a fair distribution or an adequate principle of justice.

Structural injustice

To introduce the idea of structural injustice, Iris Marion Young offers the example of affordable housing. She presents the case of Sandy whose salary is not enough to pay her rent and faces the possibility of homelessness.Footnote ¹⁸ According to Young, Sandy is in a social-structural position, that of vulnerability to homelessness, which is unfair since she is in this position due to forces that go beyond her choices and actions. Young argues that Sandy suffers from structural injustice, since none of the agents that Sandy may have encountered has done something wrong; instead, the causes of being vulnerable to homelessness are a result of a combination of factors that are large scale and relatively long term. All these factors, put into a mix, lead to some individuals being in the social position of vulnerability to homelessness. Young concludes that ‘structural injustice exists when social processes put large groups of persons under systematic threat of domination or deprivation of the means to exercise their capabilities, at the same time that these processes enable others to dominate or have a large range of opportunities of exercising the capabilities available to them.’Footnote ¹⁹

Young argues that structural processes that are unjust have four aspects.Footnote ²⁰ First, they generate objective constraints. Structural processes shape, guide, and constraint the actions of individuals, not in the form of coercion, but by allowing or blocking possibilities and widening or narrowing the range of options that individuals have available to make their choices. Second, they generate positions for individuals within the structure and in relation to other people. In the case of Sandy, her gender and class explain much of her present circumstance. Third, these structures and positions are reinforced by actions of individuals and the informal rules that drive these actions. For example, if people think one neighbourhood is dangerous, they will not bring their businesses there and people will not want to live there, generating more devaluation of this neighbourhood. Finally, the effects of these actions in the structure have unintended consequences. Individuals who act within a system of rules do not intend to create these systemic outcomes. It is the combination of all individual actions that lead to undesirable consequences when looked at it systemically.Footnote ²¹

Young suggests that structural injustice can also happen globally. She illustrates this idea with the examples of sweatshops and the Asian crisis of 1997.Footnote ²² In both of these cases, the combination of actions of individuals, which happened in a context of no rules, left some people under the threat of domination or deprivation of the means to exercise their capabilities. To address the problem of lack of rules, or the structural element of the injustice, Young offers a political responsibility, which is forward-looking or remedial.Footnote ²³ This responsibility is political because it involves joining with others to take collective action to create rules that prevent these injustices. Young offers a social connection model, according to which:

Framing the ethics of the IMS

The ethics of the IMS can be framed from the perspective of either background injustice or structural injustice. Both of these ideas highlight the importance of lack of rules and regulations and of background conditions. More specifically, both suggest that due to the background conditions – or the informal rules and the positions of agents within the structure – the interaction of agents, in a context of no rules, can lead to undesirable outcomes. On the one hand, for structural injustice, these undesirable outcomes involve the possibility of domination of some agents or the deprivation of the means to exercise their capabilities. On the other hand, for background injustice, these undesirable outcomes involve unfairness or a situation in which agents cannot interact as free and equal. Moreover, both ideas emphasise the need to create rules and regulation – or a structure – that prevent domination and unfairness.

This section situated this article within the political philosophy literature. The question that arises is how, if at all, do monetary regimes raise domination and unfairness. The next section defines domination and unfairness.

Domination

This article considers Frank Lovett’s definition of domination, according to which domination arises when people or social groups are ‘dependent on a social relationship in which some other person or group wields arbitrary power over them.’Footnote ²⁵ Lovett offers a framework of domination that includes three necessary conditions: dependency, imbalance of power, and arbitrariness. Imbalance of power happens when a group has the ability to change what another group does, regardless of whether they use this ability or not.Footnote ²⁶ Because in the IMS, and in monetary unions such as the Eurozone, there is considerable power imbalance between states, this article assumes that the IMS satisfies this condition. Thus, it focuses on the conditions of arbitrary interference and dependency.

Arbitrary interference or arbitrariness can be either procedural or substantive. Arbitrariness is procedural when a power ‘is not externally constrained by effective rules, procedures, or goals that are of common knowledge to all persons and groups concerned.’Footnote ²⁷ Slavery is the paradigmatic example of arbitrary interference. A slave is subject to arbitrary interference by their master when the latter is able to interfere with the former without any constraints from rules or regulations. In contrast to the arbitrary interference of the master on the slave, the law is not arbitrary since it is under the control of citizens. For example, taxes are an interference, but because the law that sets taxes is under the control of citizens, this is not an arbitrary interference.Footnote ²⁸ In a democratic society, the law considers the views and interests of all citizens and reflects their will to regulate themselves.

While the law in well-regulated societies is not an arbitrary interference, when an agent or group can interfere with a decision-making process without being constrained by rules and procedures, the law becomes arbitrary. Consider the case of a society in which a group of wealthy and powerful people have such a strong lobby that the decision-making process of laws and policies becomes captured in a way that reflects the interests of this group only. In this case, there is procedural arbitrariness, since the power of powerful and wealthy people is not constrained by laws and regulations. If regular citizens do not have de facto control over the law and policy decisions, then these decisions become an arbitrary interference for them.Footnote ²⁹

Moreover, substantive arbitrariness happens when institutions fail to consider the welfare, world view, and interests of those affected by them.Footnote ³⁰ Procedural arbitrariness often leads to substantive arbitrariness, since those that arbitrarily interfere others, or capture the decision-making processes, do this to advance their own interests without taking into consideration the interests of those subjected to the arbitrary interference.

Finally, dependency happens when one agent is unilaterally dependent on the other, and the degree of dependency varies based on whether there is a possibility of exit from the situation.Footnote ³¹ Lovett suggests that being dominated is not a desirable situation for most people; hence, the reason for agents to stay in a situation of domination is because of dependence.Footnote ³² This dependence is higher in situations in which there is no exit from a situation. Continuing with the example of slaves, slaves in the antebellum American South had extremely high costs of exit. Because their dependency was very high, domination was very high as well.

Lovett argues that each of these conditions is necessary, but on their own they are not sufficient, for domination. This conception of domination is useful since it explains that domination does not happen if only two of these conditions are present; hence, domination can be mitigated by reducing each one of these individual conditions. Moreover, this is a more demanding conception of domination, which is adequate for a global system in which interference from interdependence is rampant and in which there is an absence of a basic structure.

Unfairness

Now that we have defined domination, I shall define unfairness. In what follows, I offer a definition of fairness that requires the satisfaction of two conditions: mutual advantage and reciprocity, or an equal distribution of autonomy. Both of these conditions are necessary, but on their own they are not sufficient, for fairness. In other words, unfairness happens when there is an erosion of either one of these two conditions.

A minimal condition for fairness is mutual advantage. If entering or staying in a contract or agreement is not beneficial to one of the participants, their participation is either the result of coercion or the result of the absence of exit possibilities.Footnote ³³ While mutual advantage is necessary for fairness, it is not a sufficient condition. There are situations that are exploitative, and hence unfair, in which both parties are better off in the agreement. In the literature, this phenomenon is called the paradox of exploitation, namely, that the exploited parties are better off by being exploited than in the absence of the agreement.Footnote ³⁴

A paradigmatic example of this paradox of exploitation are sweatshops. Sweatshops are fabrics, usually set in developing countries, in which workers work very long hours, are underpaid, and work under dangerous conditions.Footnote ³⁵ Workers at sweatshops are better off by being exploited, and receiving very low wages, in comparison with the absence of this agreement or in comparison with a situation in which they do not have any income at all.Footnote ³⁶ However, even if sweatshops are mutually advantageous to both the employers and employees, they are not fair, since the employer obtains a much higher benefit than the worker.Footnote ³⁷ In other words, the contract of sweatshops is unfair since it lacks reciprocity. Reciprocity focuses on the distribution of costs and benefits between agents that participate in a mutually advantageous activity.

Fairness requires not only mutual advantage but also reciprocity or a fair distribution of certain goods or values. Instead of focusing on the distribution of goods, this article focuses on the distribution of a value, namely autonomy. This article considers relational equality as a currency of equality, which aims for the equality of status of agents.Footnote ³⁸ According to relational equality, inequalities are problematic when they hinder the possibility of agents to relate as free and equal. Participating in an agreement can erode the equality of status of agents over time. Ronzoni illustrates this idea with the case of contracts.Footnote ³⁹ Participants are free and equal when they have enough material conditions, have bargaining power, and when accepting the contract is not the only reasonable thing to do. The outcomes of a contract, if left unregulated, may undermine the freedom and equality of agents, since the increasing inequality may hinder the bargaining power of one party or may leave this party with such few material conditions that accepting the contract is the only reasonable option. Fairness requires that agreements maintain the autonomy, or freedom and equality, of agents over time or that erosions of this value are equally distributed when maintaining full autonomy for all participants is not possible. An agreement that consistently erodes the autonomy of one of the participants while maintaining the autonomy of the other party is not reciprocal, since there is an unfair distribution of this value. In other words, even if both participants benefit from the agreement, the costs of participating, in terms of the erosion of this value, are not equally distributed; hence, the agreement is not reciprocal.

Domination and unfairness

In global social practices, domination can lead to unfairness. In a context of considerable power imbalance between agents, arbitrary interference can increase the dependency of weaker agents on stronger ones. A system that systematically reinforces the positions of advantage and disadvantage between participants and that increases the dependency of the worst-off is unfair, since there is an unequal distribution of the value of autonomy. To illustrate this idea, let us continue with the example of sweatshops. There are considerable power imbalances between sweatshop workers and employers that hire them. Moreover, their contracts happen in a context of lack of rules that regulate these contracts. Because of this absence of rules, sweatshop workers are subject to arbitrary interference from their employer who may decide how to treat them without being constrained by the law. The employer may unilaterally decide to pay workers very low wages for working very long hours, and workers are vulnerable to different kinds of abuse from their employer.Footnote ⁴⁰ Because sweatshop workers are in a desperate situation and have access to few resources, accepting the contract is the only reasonable thing to do, and hence accepting this contract is not an autonomous decision. This arbitrary interference, which occurs in a context of power imbalances, reinforces the dependency of workers on their employer. Moreover, it erodes the autonomy of workers over time, since the conditions of the contract maintain them in a situation of desperate need and vulnerability. Because this situation systematically erodes the autonomy of one group of agents while securing the autonomy of the other party, it lacks reciprocity, and hence it is unfair.

The question that arises from the above is how to reduce domination and unfairness in social practices. The first way is by creating laws that regulate these practices. These laws reduce arbitrary interference when regulation that constraints this interference is under the control of those that participate in the social practice. This regulation ought to secure the autonomy of participant agents or offer an equal distribution of this value when full autonomy to all is not possible due to interdependence. By guaranteeing, or equally distributing, autonomy, there is a reduction of dependency between agents. Because arbitrariness and dependency are necessary conditions for domination, a reduction of these conditions in turn reduces domination.

This section defined domination and unfairness and introduced the relationship between these two concepts. With these definitions in place, I shall proceed to analyse the IMS.

Domination

Domination involves arbitrary interference, which is not regulated by law or that is not under the control of citizens. In the current IMS, there is an absence of regulation of monetary spillovers. All states can freely apply monetary policy, which creates monetary spillovers on others. Because of this lack of rules, monetary spill overs can be considered an arbitrary interference on states that receive them. Arbitrariness is not only procedural but also substantive. States that apply monetary policy do not have the interests of other states in mind, and by doing so, they lead to harmful spillovers on others. Monetary spillovers have a significant impact on the macroeconomic conditions of states, since the exchange rate affects all other variables in an economy, and they can even lead to financial crises. It is widely agreed that one of the main causes of the Latin American crisis of the 1980s was the contractionary monetary policy applied by the U.S. Federal Reserve in 1979.Footnote ⁴¹ This monetary policy led to an appreciation of the U.S. dollar with respect to other currencies. Because Latin American countries had debts in dollars, the real value of Latin America’s debts increased substantially, making it harder for these countries to meet their debt obligations and leading to generalised defaults in the region, as well as in other developing countries.Footnote ⁴²

Given the considerable imbalances of power between states in the IMS and the background conditions, a system that allows all states to freely apply monetary policy reinforces the positions of advantage and disadvantage between agents and increases the dependency of developing countries on stronger ones. Because of the background conditions, some states are much more vulnerable than others to these monetary spillovers. Developing countries are more affected by monetary spillovers, since they have their debts in foreign currencies, since they are more dependent on imports from foreign countries, since their exports have a lower penetration on foreign countries and since products are internationally priced in currencies of strong countries.Footnote ⁴³ More specifically, developing countries usually have debts in the currency of a strong country – for example, in U.S. dollars or Euros – and when their currency depreciates against the strong currency, their debts are worth more in real terms.Footnote ⁴⁴ Furthermore, people in developing countries have a higher consumption of imported products for food and basic goods. Thus, when their exchange rate depreciates vis-à-vis the currency in which they buy these imported products, the real value of these products increases, leaving these people with less purchasing power to buy these products.

The harmful effects of exchange rate fluctuations generates a fear of floating that forces developing countries to spend large amounts of international reserves in trying to stabilise their currency or they peg it to that of stronger countries.Footnote ⁴⁵ This monetary arrangement is known as a dirty float. The choice to have a dirty float is not only costly – for example, these reserves could have been used on social spending – but it also undermines the ability of developing countries to use monetary policy to counteract shocks and makes them more vulnerable to currency speculation and to crises, since the market may doubt the commitment of the government to maintain the promised exchange rate level.Footnote ⁴⁶ Because the decision of states to have a dirty float happens in a context of dependency and domination, these choices cannot be said to be free choices.Footnote ⁴⁷

In contrast to developing countries, strong countries are less affected by monetary spillovers. Hereafter, I will refer to strong countries as those which have strong currencies, mainly the United States and the Eurozone.Footnote ⁴⁸ While the power of a country is reflected on its currency, having a strong currency offers additional benefits to countries that issue them and puts these countries in a privileged position within the system.Footnote ⁴⁹ This privileged position makes strong countries less affected by monetary spill overs of weaker states. For example, because international transactions are generally priced on strong currencies, such as U.S. dollars or Euros, regardless of the exchange rate to other currencies, prices of products from these countries in the international market remain the same regardless of fluctuations of the exchange rate.Footnote ⁵⁰ Another reason why strong countries are not affected by fluctuations of developing ones is that the latter countries’ exports have a lower penetration in the market of the former countries; thus, an appreciation of the currency of the weaker countries does not have a considerable impact for consumers from strong countries, who can opt for substitute products.

Unfairness

A minimal condition for a contract to be fair is that it has to be mutually beneficial. Participation in the floating scenario of the IMS satisfies the condition of mutual benefit, due to the importance of the IMS in allowing trade. Because participation in the IMS allows states to exchange their currencies for others, they are able to participate in international trade, which brings states considerable benefits. Thus, participation in this practice is always beneficial. While mutual benefit is a necessary condition for fairness, it is not a sufficient condition. Fairness also requires reciprocity or an equal distribution of the value of autonomy.

The agents that participate in the IMS are states. Autonomy at the global level refers to the capacity of states to have sovereignty and self-determination. More specifically, the kind of sovereignty that states ought to have in the IMS is effective sovereignty.Footnote ⁵¹ This kind of sovereignty refers to the ability of states to achieve their desired policy objectives. Effective sovereignty can be achieved even if states delegate their monetary policy to an independent institution, such as a central bank.Footnote ⁵² If central bankers can apply better monetary policy than governments and apply it in a way that allows the state to achieve their policy objectives, then there is effective sovereignty even in the absence of the state’s control over monetary policy. Moreover, a state can have control over their monetary policy, that is, they may have the ability to issue and control their own currency, but if they cannot achieve their desired policy objectives, due to external factors, then they do not have effective sovereignty.Footnote ⁵³

Monetary spillovers hinder the effective sovereignty of states or their ability to achieve their desired policy objectives. In an open economy, control over the exchange rate allows states to achieve internal balance by modifying the international demand for domestic goods or the direction of trade flows.Footnote ⁵⁴ These trade flows have effects on the levels of employment, wages, and ultimately prices. These internal variables, such as employment and purchasing power, are crucial to achieving their policy objectives and to deliver social justice at home.Footnote ⁵⁵ Moreover, the exchange rate level – depreciated or appreciated – has distributional impacts for different groups within a society.Footnote ⁵⁶ States that participate in the IMS may have control over their monetary policy, that is, they may have the ability to issue and control their own currency, but if they cannot achieve their policy objectives, due to the monetary spillovers that stem from interdependence, then they do not have effective sovereignty.Footnote ⁵⁷

Because of interdependence, states that participate in the IMS are bound to be affected by monetary spillovers, and hence they are bound to have some degree of erosion of their effective sovereignty. While participation in the IMS cannot guarantee full effective sovereignty for all participants, the principle of non-domination aims for a fair or an equal distribution of this value. A system that consistently reinforces the positions of advantage and disadvantage of states in a way that increases the dependency of weaker ones is not reciprocal, since there is no fair distribution of effective sovereignty. The principle of non-domination applied to the IMS can be presented as follows:

Securing an equal distribution of effective sovereignty entails setting some restrictions on strong states but not on weaker ones. Because of the background conditions when a strong state – such as the United States – applies monetary policy, this has profound effects on developing countries. In contrast to strong countries, when a developing state, such as Mozambique, applies monetary policy, this does not substantially affect others. Moreover, this principle aims to offer an equal distribution of effective sovereignty, and not the complete elimination of monetary spillovers. Completely eliminating monetary spillovers would lead to an unfair distribution of effective sovereignty, since it would deny strong countries the access to this value.Footnote ⁵⁸ Given the central position of strong countries in the IMS, their monetary policy generates monetary spillovers on others. Because different countries prefer different levels of exchange rates, eliminating monetary spillovers would be overly restrictive to strong countries, ultimately denying them effective sovereignty. For example, citizens in Latin American countries are mainly consumers, and the majority of the products that they consume are imported ones. Thus, Latin American countries prefer a strong currency, since this makes the relative prices of imports cheaper.Footnote ⁵⁹ Unlike the above, East Asian countries depend on their exports and try to keep the exchange rate artificially low, as a strategy to stimulate development and economic growth.Footnote ⁶⁰

A sceptic may suggest that because in a global context interference is rampant, and there is overall lack of regulation, we should focus on a less stringent value, such as basic non-domination.Footnote ⁶¹ Along these lines, someone could claim that domination in the floating scenario of the IMS happens in moments of crises, since, in these crises, states become overly reliant on other creditor states and on international organisations to go back to normal conditions.Footnote ⁶² Similarly, a sceptic could argue that because, in a context of interdependence, states cannot have full effective sovereignty, reciprocity ought to guarantee another value that is less stringent, such as minimal levels of sovereignty. These minimal levels of sovereignty would be eroded in cases of crisis only.

My answer to this objection is as follows: While in situations of crises there is clearly domination, domination does not only happen in the moment of a meltdown. Instead of a binary metric of crisis, or lack thereof, domination happens as a continuum and it intensifies as a state’s effective sovereignty becomes more constrained by structural factors, even absent of a formal meltdown.Footnote ⁶³ Similarly, that the fact that an interdependent system cannot guarantee full effective sovereignty for all actors involved does not entail that we should ignore the distribution of this value altogether and focus on another less stringent value instead. The distribution of the value of effective sovereignty matters even if interdependence prevents the full achievement of this value for all agents. Moreover, a social practice can be unfair even in the absence of a crisis. A system that continually and systematically reinforces the position of advantage and disadvantage of agents and that institutionalises profound dependencies is unjust in its daily operation, not merely at the moment of a breakdown. Justice is a preventive, rather than a purely remedial ideal. Thus, a fair distribution of effective sovereignty ought to prevent these crises by offering an equal distribution of this value.

A possible policy to mitigate domination and unfairness in the IMS is to determine bands in which the exchange rate level of strong states can fluctuate to offer an equal distribution of effective sovereignty.Footnote ⁶⁴ These bands or target zones could act as limits to the exchange rate fluctuations of strong countries, and a penalty could be established if they are violated. This system offers flexibility to strong states, since they could decide to violate the band, but as a penalty pay funds. These funds could go to a global fund that operates as a redistributive system that is used to offer an equal distribution of effective sovereignty. Moreover, this system would reduce the arbitrariness of monetary spillovers, since there are rules and procedures that constrain them.

In the next section, I address the second plausible policy option that stems from the trilemma, the case of fixed exchange rates with open capital markets.

Domination

Arbitrary interference in the case of monetary unions is different from the floating scenario. When countries agree to enter a monetary union, they all agree to delegate exchange rate and monetary policy to a supranational entity as part of the agreement, which is why the exchange rate of the union becomes an issue that concerns all members. Because these countries have delegated their monetary policy to the European Central Bank (ECB), the decisions of the ECB are not arbitrary interferences for countries that belong to the union. This is because, as we saw, those interferences that are under our control, such as the law, are not arbitrary. Similarly, when the decisions of the ECB consider the will and interests of all participants in the monetary union, these decisions are not arbitrary, even if they are not the ones needed by some countries.

Arbitrary interference in this case happens when an agent or group A can interfere with a decision-making process, without being constrained by rules and procedures.Footnote ⁶⁵ As we saw, if the law is captured by a group of wealthy people that engage in lobby, then it is not de facto under the control of citizens, and hence it becomes arbitrary for them. This is the type of procedural unfairness that exists in the Eurozone today; weaker countries in the Eurozone do not have accountability for the decisions of Eurozone institutions, since they cannot threaten to leave the union.Footnote ⁶⁶ For this reason, the decisions of Eurozone institutions become accountable to the most powerful members only. In the case of a monetary union, there is arbitrary interference when the decisions of supranational institutions become captured by a group of countries in the union, or in the absence of clear rules and procedures that establish how the ECB should operate. This arbitrary interference is also substantive, since when a group captures the decisions of an institution, they do so to advance their own personal or collective interests at the expense of the interests of others.

This capture of supranational institutions reinforces the positions of advantage and disadvantage of states and increases the dependency of weaker states. Strong countries that capture the decisions of the ECB obtain the benefits of integration without the costs of delegating monetary policy since, as opposed to other countries, they still have de facto control over it. For example, in the years previous to the Euro crisis, the exchange rate and monetary policy of the Eurozone allowed Germany to have nearly zero inflation, while inflation was high in rapidly growing economies.Footnote ⁶⁷ Similarly, during the crisis, the exchange rate of the Eurozone was high, even if some countries were facing major recessions during this crisis.Footnote ⁶⁸ In addition to capture, there were structural factors of having fixed currencies, such as the need to take debt to finance the stability of the currency, that contributed to the Euro crisis.Footnote ⁶⁹

Weak states in the Eurozone are more dependent on others, not only since they are more prone to crises but also since they are less able to recover from these crises. When countries enter a monetary union, such as the Eurozone, they give up relevant policy tools, such as their ability to implement exchange rate and monetary policy, and they are also constrained in their use of fiscal policy due to the convergence criteria and the Growth and Stability Pact.Footnote ⁷⁰ These policy tools are essential for countries to achieve internal macroeconomic stability and to counteract and mitigate crises. Countries that have their currencies fixed lose a natural adjustment mechanism of floating exchange rates, which allows countries to recover from crises faster. Moreover, having a common currency puts stronger constraints on countries compared with having a fixed currency. While countries that have fixed currencies still have some ability to pursue monetary devaluations (or revaluations) or to change the parity of their currency from time to time, countries that share the currency lose this ability. Therefore, when countries that belong to a monetary union such as the Eurozone face a crisis, they are objectively worse off than stand-alone countries.Footnote ⁷¹

Unfairness

A minimal, but not sufficient, condition for fairness is mutual advantage. In the floating scenario, we saw that because of the considerable benefits of trade, participation in the IMS is always beneficial. When states enter a monetary union, they enter a second agreement, within the first agreement of participating in the IMS, which ought to also be beneficial. Economists have offered a theory of optimum currency area (OCA), which aims to determine whether joining, or staying, in a monetary union is beneficial for states.Footnote ⁷² According to this theory, participating in the union is beneficial when the degree of integration between countries – in terms of trade, labour, and capital mobility – exceeds a certain threshold. Because the Eurozone is not an OCA, since it does not reach the threshold, the costs of integration are higher than the benefits.Footnote ⁷³ Moreover, because in the Eurozone there has been a situation of capture in the absence of solidarity, since there is no fiscal federalism or policy of solidarity regarding bailouts, the current Eurozone does not meet the minimal condition of mutual advantage.

Juri Viehoff has offered an equitable risk-sharing principle for monetary unions. According to this principle, institutions of monetary unions must insure states from the risks of monetary integration up to a level where participation is beneficial.Footnote ⁷⁴ He suggests that this benefit could be estimated by using the OCA theory. Mutual benefit is relevant since in the absence of mutual advantage, participation in an agreement is either coerced or those who take part in the agreement do not have an exit option. However, mutual benefit is a necessary but not sufficient condition for fairness. The principle of non-domination is more demanding than the equitable risk-sharing principle, since it does consider not only that institutions of monetary unions should guarantee mutual advantage but also that the value of effective sovereignty ought to be fairly or equally distributed.

Countries that join a monetary union, such as the Eurozone, delegate their monetary policy to the ECB and have more restrictions than countries that let their currency float. While restrictions in the case of monetary unions are stronger than in the floating case, these restrictions do not necessarily entail an erosion of effective sovereignty. States can maintain effective sovereignty when they delegate monetary policy to an institution that tracks their interests in a way that allows them to achieve their policy objectives. This is why independent central banks and well-run monetary unions do not necessarily undermine effective sovereignty but are rather an expression of it. The violation of effective sovereignty happens when the institutions of monetary unions – not only the ECB – do not sufficiently track the interests of those that delegate monetary policy. Ideally, all states ought to have complete effective sovereignty, but when this value cannot be fully satisfied due to interdependence, it ought to be equally distributed.

The focus of the principle of non-domination in monetary unions ought to be on outcomes rather than on a single process, such as the process of monetary policy applied by the ECB. Because there are at least two ways of achieving certain outcomes – monetary and fiscal – this case may involve two different processes, and hence a fair outcome may be achieved even if there is arbitrary interference, for example, due to capture, in one of these processes. For example, in the case of the United States, a fiscal federalism, or fiscal transfers from some states to others, offsets the impacts of inadequate monetary policy by using fiscal policy. While the monetary policy of the country as a whole may reflect the needs of some states only, the effects of misalignments in states in which this monetary policy does not match their real exchange rate, is counteracted by using fiscal policy. Arbitrary interference, or capture, becomes less problematic in a context of solidarity, since a fair outcome can still be achieved via fiscal policy. Therefore, the policy proposal for monetary unions is to implement a similar system of fiscal federalism, or solidarity as the one that exists in the United States. This system of fiscal federalism ought to ensure both mutual advantage for member states, and an equal distribution of effective sovereignty.

Up to this point, I have addressed the first two scenarios of the trilemma: the floating case and the monetary union case of fixed exchange rates with open capital markets. In the next section, I address the final case of the trilemma.

Domination

The IMS implemented during Bretton Woods in 1944 was an agreement between participant states that agreed to have closed capital markets and fixed exchange rates. All states fixed their exchange rate to the U.S. dollar, and in turn the United States fixed their currency to gold at a fixed rate of $35 per ounce. Because states had fixed currencies, they had to revalue their currencies from time to time to maintain internal and external balance, and these revaluations had to be authorised by the IMF.Footnote ⁷⁵ States, other than the United States, held their reserves in U.S. dollars or gold and had the right to sell U.S. dollars to the U.S. Federal Reserve in exchange for gold at this price.Footnote ⁷⁶ During this period, the only convertible currencies, or those that could be exchanged for other currencies, were U.S. and Canadian dollars. By the end of 1958, most countries in Europe restored convertibility, which led to capital flows, constant currency crises, and ultimately to the fall of this system.Footnote ⁷⁷ In what follows, I consider the nonconvertible period, from 1944 to 1958, which de facto had closed capital markets.

As we have seen, arbitrary interference happens either due to power that is not constrained by the law or by a decision-making process that is captured by a group of agents. A system of closed capital markets aims to prevent interference from capital flows, and their impacts on the internal macroeconomic situation of states as well as their capacity to apply independent monetary policy. In other words, it aims to prevent interference. While non-domination does not necessarily require absence of interference – in the sense that as long as interferences are regulated by the law, they are not arbitrary – there cannot be arbitrary interference in a scenario in which there is no interference. Moreover, the conditions of the Bretton Woods agreement were discussed and accepted between autonomous states, and there is no evidence of the agreement being an arbitrary interference due to capture of one group of agents. From this experience, there is not enough evidence to show that a system in which states implement extensive capital controls leads to arbitrary interference or that states that unilaterally decide to implement these controls such as India and China before 1990s were subject to arbitrary interference.Footnote ⁷⁸

A sceptic may point out that the Bretton Woods system led to unforeseen kinds of interferences that were not previously considered in the agreement, and hence that were not constrained by the rules. They may point out that many states incurred in trade deficit or surpluses, which led to imbalances.Footnote ⁷⁹ Alternatively, they may point out that because the distribution of voting rights did not offer all participants an equal distribution to participate in the decision-making process of the IMF, there was procedural arbitrariness.Footnote ⁸⁰ My answer to this objections is that trade imbalances a system of fixed exchange rates, rather than due to the presence of capital controls. Similarly, the issue of voting rights that was implemented in this agreement is not a feature of closed capital markets but instead a more general problem that we still have today.

In contrast to arbitrary interference, extensive capital controls can lead to dependency. During the nonconvertible period of Bretton Woods, currencies – with the exception of the U.S. and Canadian dollars – were not convertible for others, which is a kind of capital control on exchange rate transactions. Lack of convertibility makes trade almost impossible unless there is dollarisation or a situation in which the currency of a strong country is used as a means of exchange and store of wealth.Footnote ⁸¹ However, dollarisation increases dependency of weaker countries to strong ones that issue the currency that they hold. When citizens hold a foreign currency, this reduces the possibility of the home government to enjoy the benefits of seigniorage, which is an interest free loan to the central bank that comes from holding its currency.Footnote ⁸² Along these lines, France’s minister of finance at that time, Valéry Giscard D’Estaing, argued that the United States had the ‘exorbitant privilege’ of borrowing at very low interest rates, since all other states held U.S. dollars.Footnote ⁸³ This systemic element reinforces the positions of advantage and disadvantage of states and could lead to dependency of weaker states. Moreover, extensive capital controls could lead to a reduction of trade, and hence they could eventually worsen the position of countries reliant on international trade, making them more vulnerable and dependent.

In a context of power imbalance between agents, Lovett’s definition of domination requires both arbitrary interference and dependency. While there are some elements of dependency in this system, there is no clear evidence of arbitrariness. Therefore, there is no domination in this horn of the trilemma.

Unfairness

In this article, we have seen that a minimum condition for a contract to be fair is that it has to be mutually advantageous to all parties. This condition requires agents to be better off than in the absence of the agreement. When we compare this horn of the trilemma with the counterfactual scenario of having open capital markets, we are faced with a tension between the benefits of the reduction of financial crises and the costs that extensive capital controls can have on trade. On the one hand, during the nonconvertible period of Bretton Woods, there were no banking crises.Footnote ⁸⁴ Aaron James has defended financial autarky on these grounds. Because capital market liberalisation creates the risk of financial crises, and these crises cannot be justified to the worse off, he concludes that financial liberalisation ought to be curbed even at great cost.Footnote ⁸⁵ On the other hand, the costs are a possible reduction of trade. Bretton Woods happened after a period in which the world experienced two world wars. Thus, even if there was some degree of trade growth during this time,Footnote ⁸⁶ we do not know if trade would have grown more in the absence of extensive capital controls. Moreover, most trade growth happened after 1958, during the convertible period of Bretton Woods, in which there were no capital controls that inhibited convertibility.Footnote ⁸⁷ However, during this convertible period of Bretton Woods, currency crises and other kinds of crises were rampant, and even more common than today.Footnote ⁸⁸ The detrimental effects that extensive capital controls can have on trade can be more clearly appreciated in India and China. The dismantling of their extensive capital controls in the 1980s and 1990s facilitated trade, which led to considerable poverty and inequality reduction in these countries.Footnote ⁸⁹ To be clear, these countries maintained some nonextensive capital controls after the 1990s but dismantled the system of extensive capital controls.

To achieve this minimum condition of fairness, a possible policy proposal is to allow certain types of capital flows that enable trade, up to a level in which the benefits of trade surpass the risk of having this kind of capital mobility. These capital flows include currency convertibility for trade or for current account transactions, foreign direct investment (FDI), and loans for intertemporal trade. Here, I assume that all states ought to be better off than in a system of open capital markets, since how the system affects individual citizens within countries depends on the redistribution within each state.

In this article, we have seen that fairness does not only require mutual advantage, but also reciprocity, or an equal distribution of effective sovereignty. In the two previous scenarios, we saw that effective sovereignty was constrained due to interdependence. In contrast to these scenarios, because in a system of closed capital markets there is no interdependence, there is no problem of distribution of effective sovereignty between states. However, a scenario of closed capital markets raises a different tension between the collective freedom of a political community to political self-determination, and citizens’ freedom to manage cross-border portfolio. The extensive capital controls that existed during Bretton Woods, and in India and China before the 1990s, involved government intervention on a large part of the state’s economic and financial activity.Footnote ⁹⁰ There were also restrictions on the assets in which banks could invest and that citizens could hold.Footnote ⁹¹ For example, during the 1960s, British citizens were prohibited to take more than £50 on their holidays to foreign countries.Footnote ⁹² These limitations on capital mobility for citizens limited their freedom of movement and, hence, their ability to work in a foreign county. If we consider the capacity of people to move across borders as necessary for self-determination,Footnote ⁹³ this scenario presents a tension between the political self-determination of a political community to implement extensive capital controls and the personal self-determination of citizens.

To address this tension, we can draw on the work of Chiara Cordelli and Jonathan Levy. Cordelli and Levy argue that sovereignty can be constrained not only by foreign claims but also by internal ones.Footnote ⁹⁴ More specifically, they suggest that sovereignty can be constrained to guarantee certain basic liberties of people. They illustrate this idea with a state that has the right to control their own borders in terms of the immigration of people. This right of the political community to self-determination is constrained by the fundamental claims of refugees.Footnote ⁹⁵ By following Rawls, Cordelli and Levy define a basic liberty as one that is necessary for individuals to develop at least one of their two moral powers, namely a capacity for following a conception of the good, which they call personal self-determination, and a capacity for a sense of justice.

Not all kinds of capital mobility count as a basic liberty, and some forms of capital flows may even undermine these liberties. Personal self-determination requires individuals to maintain a social minimum, and unrestricted capital mobility undermines the capacity of the state to provide this minimum.Footnote ⁹⁶ For example, destabilising capital flows of hot money or currency speculation undermine the capacity of the state to provide this social minimum. In other words, restricting capital mobility, in general, is necessary not only to achieve effective sovereignty, which is a core component of justice, but also to secure personal self-determination. For this reason, some form of deeper rule-based capital management is permissible.

In contrast to general free capital movement, Cordelli and Levy argue that there are specific kinds of capital mobility that count as basic liberties.Footnote ⁹⁷ They identify three kinds of capital mobility. First, there are those needed to honour the moral and religious obligations of individuals, such as those needed to discharge their humanitarian obligations. These capital flows include humanitarian transfers and remittances. Second, there are those needed to protect individuals’ ability to have personal self-determination over time, which requires a secure store of value and the ability to plan long term. This requires the possibility to convert their assets into a foreign currency when the state does not have the capacity to maintain the value of the currency overtime. However, these capital movements are also constrained by the possibility that they contribute to devastating devaluations of the currency. Third, if there is a basic liberty to free international movement of people, some kinds of capital movement are instrumental to secure this freedom, and hence they should also be considered a basic liberty.

In this section, we addressed the scenario of closed capital markets. While this scenario is free from domination, it is not free from unfairness. This section also presented a tension between political and personal self-determination. The idea that political self-determination can be constrained to guarantee the basic liberties of people can also set constraints on the principle of non-domination. While institutions of monetary unions ought to equally distribute effective sovereignty, this sovereignty can also be constrained to secure the basic liberties of people.