France, which now holds the presidency of the G-20, has chosen reform of the international monetary system as its main priority for the Cannes summit in November. But is the issue worth the time and energy officials will devote to it? And where can such discussions lead?
When French President Nicolas Sarkozy announced his G-20 agenda a year ago, most expected that at end-2011 the world economy would be cruising at a comfortable speed. At the same time, burgeoning concerns about “currency wars” suggested that Sarkozy’s priorities were correct.
Unfortunately, other matters now call for more urgent attention: with the flagging global recovery and the mounting debt crisis on everybody’s mind, focusing on longer-term monetary reform might look like a distraction.
A case can be made, however, for keeping discussion of the issue alive. Indeed, deficiencies in the global monetary system contributed to several economic failings in recent years: excess global liquidity; over-accumulation of dollar-denominated reserve assets; uneven policy responses to current-account surpluses and deficits; resistance to necessary exchange-rate adjustments in the emerging world; and coexistence of inflation and deflation at a global level.
All of these shortcomings are in some way manifestations of the same international monetary deficiencies. Addressing them might not solve today’s economic woes, but it would help limit the build-up of new problems and provide guidance for alleviating today’s concerns.
This is where the second question – where can such discussions lead? – comes into play. France, paradoxically, has neither made clear which problems global monetary reform is expected to solve, nor proposed a grand plan for such reform. Rather, it has taken topics one at a time, seeking to reach consensus separately on each: the completion of efforts undertaken by the 2010 South Korean presidency to strengthen multilateral liquidity-provision schemes; the strengthening of multilateral surveillance; the appropriate use of capital controls; and a change in the composition of the basket of currencies that comprise the International Monetary Fund’s Special Drawing Rights, a unit of account that was once expected to evolve into a global store of value.
This piecemeal approach is politically savvy but analytically perplexing, as it provides no clues regarding the big picture. The dots are there, but it is hard to see how to connect them. Since the international monetary system has experienced few changes historically, the effort to revamp it is bound to be a long march. As a result, the appropriateness of small steps should be assessed from a perspective covering at least the next 10-15 years.
The most likely scenario at that time horizon is a multi-polar system of one or several key international currencies, with the euro (assuming its survival) and China’s renminbi being prime candidates to second the US dollar in this role. To be sure, both currently have severe shortcomings, and only one might attain international-currency status – or other currencies could emerge, though at a significantly longer time horizon. But the economic logic points unambiguously in the direction of multi-polarity.
Multi-polarity promises capital mobility and exchange-rate flexibility between the poles, as well as the development of a liquid market for benchmark bonds in each region. But the stability of a genuinely multi-polar system cannot be taken for granted, for it will require each of the monetary poles to agree to depart from purely domestic priorities and stand ready to fulfill its international duties, both in normal times and during crises.
The main economic and currency blocs clearly do not meet such preconditions today, albeit for different reasons. China has taken significant steps in the direction of currency internationalization, but its policy system remains very domestically oriented. The eurozone, now under severe stress, could emerge stronger from its current crisis, but it would have to depart from its traditionally neutral stance towards internationalization. And the United States is not yet willing to accept full responsibility for the global repercussions of its macroeconomic policies.
As the international monetary system moves towards multi-polarity, then, the role of international coordination is to reap the full benefits of this market-based movement and attenuate the risks involved. The discussions surrounding the enlargement of the SDR basket (by including the renminbi) and coordination of bilateral swap arrangements should be understood from this perspective.
A truly multilateral system, organized around a quasi-global currency and centralized management of global liquidity, remains a possible outcome, but not the most likely one. In the short run, the necessary conditions will not be met, not least because no large country is ready to deviate from domestic priorities. In the future, however (say, in the event of another global crisis), such a scenario might return to the fore.
These broad perspectives are unlikely to be discussed in Cannes. This is perhaps unavoidable, because leaders must focus on what they can actually deliver. Even so, it would be preferable to leave the technicalities of the SDR basket and liquidity-provision schemes to finance ministers, and to let heads of state and government discuss the issue for which they are indispensable: the politics of global currency reform.
This commentary draws on a recent co-authored report, Global Currencies for Tomorrow: A European Perspective (Bruegel and CEPII, 2011).
By Jean Pisani-Ferry, Director of Bruegel, an international economics think tank, Professor of Economics at Université Paris-Dauphine, and a member of the French Prime Minister’s Council of Economic Analysis.