One of the reasons why Javier Milei, the elected president of Argentina, has become famous is his radical and often bizarre ideas on economic issues: among other things, he proposes abolishing the Argentine currency, the peso, and adopting the US dollar as currency. He also proposes – with a certain tendency to exaggeration – to “explode” the Argentine Central Bank, which would no longer make sense with the introduction of the dollar and, according to Milei, is the reason for the eternal economic crisis in which the country finds itself.
Milei’s exaggerated statements aside, there are actually some countries that do not have their own currency and have therefore forgone a central bank as an institution. However, these are almost exclusively very small states with underdeveloped economies, which are therefore difficult to compare with Argentina: If Milei actually implements his idea of dollarizing the economy and closing the central bank, the consequences threaten to be unpredictable.
The countries that do not have their own central bank are mainly small island states. For example, in Oceania there are some countries: the states of Micronesia; Kiribati, a republic comprising 33 coral atolls and various islands stretching along the equator; Tuvalu; the Marshall Islands; Nauru, an island of 21 square kilometers; and the Palau Archipelago. These states have adopted the US dollar or the Australian dollar as their currency: their economy is based mainly on tourism and the import of goods from abroad, and with this decision they have ensured that they have stable currencies for trade without there is a risk of large exchange rate fluctuations.
The island states without central banks also include the Isle of Man, an island in the Irish Sea that is not part of the United Kingdom but is still dependent on the British crown: it has its own currency, the Mann Sterling, issued by the local treasury , which is, however, pegged to the British pound and therefore dependent on the policies of the Bank of England.
In Europe there are three countries without their own currency or central bank, namely the Principality of Monaco, Liechtenstein and Andorra. All three adopt the euro as the official currency, and this has never caused any particular problems: both due to their real proximity and economic connection with European countries for which the common currency is quite convenient, and due to the fact that, given their A common currency is of considerable importance. Uniformity with the rest of the European economy can be maintained without distortion within the framework of the European Central Bank’s monetary policy. Instead they use the euro, although they have a central bank, albeit with limited tasks: San Marino, Vatican City, Kosovo and Montenegro.
If you abandon your own currency and central bank, the risk of distorting the economy is quite high. A state without its central bank first of all loses the possibility of its own monetary policy: it cannot print money, it cannot set the level of reference interest rates or the exchange rate against other currencies. Specifically, there is no possibility of using monetary policy to stabilize the economy when necessary (e.g. when raising interest rates to combat inflation).
When you introduce another currency, you essentially choose to subject yourself to the monetary policy of the central bank that issues it: if you introduce the euro, you are subject to the decisions of the ECB, if you introduce the dollar, those of the Federal Reserve, the US Central Bank.
And that can be distorting when there are big differences between countries with a common currency. To put it simply, currencies are the reflection of the economies they represent: strong economies have strong and stable currencies, such as the dollar for the United States or the euro for the Eurozone; Weak and unstable economies have weak and unstable currencies that can quickly lose value. The introduction of a strong currency such as the US dollar in a weak economy on the verge of default such as Argentina would lead to a number of distortions that could endanger the economic system.
However, there are South American countries that have officially adopted the dollar as their currency: Panama, which also gave up its central bank, Ecuador and El Salvador, which, however, retained their central bank for other functions such as banking supervision. Again, the comparison is only possible based on geographical proximity: these three countries have much smaller and less problematic economies than Argentina.
– Also read: Could Argentina really switch to the dollar?