Blog Post

International Monetary System Reform: Will the G-20 Make Significant Progress?

President Sarkozy of France, current head of the G-20, has slipped comfortably into France’s traditional role of calling for fundamental reform of the international monetary system (IMS). On February 19, the G-20 finance ministers and central bank governors met in Paris and dutifully laid out a work program “aimed at strengthening the functioning of the […]

By: Date: February 22, 2011 Topic: Global Economics & Governance

President Sarkozy of France, current head of the G-20, has slipped comfortably into France’s traditional role of calling for fundamental reform of the international monetary system (IMS). On February 19, the G-20 finance ministers and central bank governors met in Paris and dutifully laid out a work program “aimed at strengthening the functioning of the IMS.” Will France and the G-20 be able to deliver more IMS reform than in previous efforts over the past four decades? The probable answer is no. At best, one can hope for a dialogue in sufficient depth that it will produce modest evolution, but fundamental IMS reform is likely to remain out of reach.

The principal reasons for such lack of progress are, first, the non-acceptance by countries, in particular the systemically important countries, such as the members of the G-20, of any individual obligation to promote global economic and financial stability, and second, the absence of consensus on what needs fixing in the current system, or non-system as some prefer to describe it.

With respect to the promotion of global economic and financial stability, countries today voluntarily cooperate through such mechanisms as the financial stability board and the G-20 itself to adopt and adapt national policies that are intended to contribute to global stability. But voluntary cooperation is as far as these processes can take us. Countries have no formal obligation to subject their policies to a global standard. The obligations currently enshrined in the Articles of Agreement of the International Monetary Fund (IMF), for example, are limited to the promotion of internal and external stability of each individual country by itself.

With respect to what needs fixing in the IMS, views and priorities are diverse. In the wake of the global economic and financial crisis and the associated backlash against the United States and its policies, representatives of France and a number of other countries have focused on the role of the US dollar in the international monetary system. These critics tend to elide the distinction between the US dollar’s somewhat reduced share of international reserves (about 60 percent) and the dollar’s quantitatively much more important role in the international financial system, in which the stock of assets is at least six times and large and activitiy is dominated by the private-sector institutions and decision making. Altering the dollar’s reserve role would have little or no impact on the dollar’s role in private international transactions or on global imbalances.

Representatives of other countries focus on international capital flows, which overwhelmingly involve the private sector but may be influenced by the monetary and financial policies of governments. This more relevant strand of the debate about the IMS has seen a revival of discussion of capital account liberalization and capital controls in the context of macro-prudential concerns as well as of possible distortions to the global economy and financial system introduced by such controls.

A third strand of the IMS debate involves the potential problems associated with current account imbalances and the shortcomings of the global adjustment process. When national policies are rooted in countries’ concerns with internal and external balance in their own economies, largely ignoring spillover effects on other economies and implications for the global economy and financial system, the system as a whole may be adversely impacted.

IMS reform should be about each of these issue areas and more. IMS reform should be comprehensive, and it should strengthen the IMF as the central institution of the system.

One example of a promising, comprehensive agenda for IMS reform is the report [pdf] of the Palais-Royal Initiative. In this effort, Michel Camdessus, Alexandre Lamfalussy, and Tommaso Padoa-Schioppa assembled a group 18 people from 15 countries to lay out a cooperative approach to reform the IMS for the 21st century. I was honored to participate in the group, which advanced 18 suggestions. The individual suggestions attracted different degrees of enthusiasm from the individual participants, but the group was able to agree that each of them should be on the agenda for discussion. In my view, the merit of the report of the Palais-Royal Initiative is that it is comprehensive makes concrete suggestions that each merit serious consideration. Five features of the report deserve to be highlighted.
First, the report calls for amendment of the IMF Articles of Agreement to establish for each IMF member the obligation to promote not only domestic internal and external stability but also global economic and financial stability. Some observers argue that the current IMF article IV on exchange rate arrangements establishes this obligation, but that is not how it has been interpreted.

Second, the report calls for the establishment of norms applicable to all members, but in particular systemically important countries, with regard to their policies and economic and financial performance, including but not solely with respect to exchange rates. Moreover, a country’s performance relative to those norms would be systematically assessed. Most important, if a country were not living up to its obligations it would be subject to consequences, in other words sanctions. This approach is consistent with what I advocated in my recent proposal to strengthen IMF surveillance. It differs in three respects from the G-20′s effort to establish indicators and indicative guidelines for global imbalances: the focus is on more than external imbalances, compliance involves more than a peer-review process, and lack of compliance may result in concrete sanctions.

Third, the report recognizes that the phenomenon of global liquidity is poorly understood and essentially undefined. The report also recognizes that the IMF has an important role to play in this area, not only with respect to enhancing understanding but also in monitoring capital controls and other policies that influence capital flows to ensure that they do not add further distortions to the system as a whole and do not frustrate needed adjustment. The report recommends amending the IMF Articles of Agreement to achieve this objective. It also recommends consideration of a number of ways in which the IMF’s role as the principal international lender of last resort could be enhanced.

Fourth, the report makes a number of suggestions for consideration with respect to special drawing rights (SDR) and the role of the SDR in the system. This set of recommendations is controversial, but the issues surrounding the role of the SDR deserve serious consideration if for no other reason than to set them aside once and for all.

Finally, the report of the Palais-Royal Initiative makes several suggestions with respect to systemic governance in order to enhance the role of the IMF in the system. Many of these suggestions have been debated for years, but the emergence of the G-20 has given them new prominence. The core issue is whether the G-20 will operate outside the system or within a more comprehensive system.

The G-20′s work program outlined in the February 19 Paris communiqué touches at least indirectly on most of these topics. Although I am skeptical whether the G-20 will be able to agree to substantial, revolutionary changes to the IMS, I am hopeful that the process of examination of these issues will enhance understanding of the IMS and over time promote its further constructive evolution.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Blog Post

World Cup Economics

As we approach the final rounds of the tournament, here are some recent contributions about the economics and economic impact of the World Cup.

By: Silvia Merler Topic: Global Economics & Governance Date: July 9, 2018
Read article More on this topic More by this author

Opinion

Ubu ou Machiavel?

L'administration Trump veut imposer une approche transactionnelle des relations économiques gouvernée par le rapport de force bilatéral en lieu et place du contrat multilatéral. Un défi d'une ampleur inédite pour l'Europe.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 6, 2018
Read article More on this topic More by this author

Blog Post

Ukraine: The struggle for reforms continues

The modernisation of the Ukrainian economy and state continues to develop at an unsatisfactory pace due to a lack of pro-reform political consensus. The two upcoming election campaigns in 2019 (presidential and parliamentary) make the reform process even slower and additionally put its effectiveness and sustainability under risk. The international community has a limited toolkit to overcome this stalemate.

By: Marek Dabrowski Topic: Global Economics & Governance Date: July 4, 2018
Read article More on this topic More by this author

Opinion

Can Multilateralism Adapt?

Global governance requires rules, because flexibility and goodwill alone cannot tackle the hardest shared problems. With multilateralism under attack, the narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 3, 2018
Read article More on this topic More by this author

Blog Post

US tariffs and China's holding of Treasuries

China has the biggest bilateral trade surplus vis-à-vis the US but is also a top holder of US government bonds. While China has started to counteract US trade tariffs, economists have been discussing the case of China acting on its holdings of US Treasuries. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: July 2, 2018
Read about event

Upcoming Event

Sep
3-4
08:30

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Nadia Calviño, Maria Demertzis, Mariya Gabriel, Péter Kaderják, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Montserrat Mir Roca, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Jean-Claude Trichet, Johan Van Overtveldt, Margrethe Vestager, Reinhilde Veugelers, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Read article

Blog Post

Trading invisibles: Exposure of countries to GDPR

This blog post identifies provisions of the EU’s General Data Protection Regulation (GDPR) that affect foreign companies, and discusses implications for trade in services with the EU. The authors provide a novel mapping of countries’ relative exposure to these regulations by a) measuring the digital maturity of their service exports to the EU; and b) the share of these exports in national GDP.

By: Sonali Chowdhry and Nicolas Moës Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 28, 2018
Read about event More on this topic

Past Event

Past Event

Trade war trinity: analysis of global consequences

Analysis of the long-term impact of the trade war and its three key players: EU, US, and China.

Speakers: Alicia García-Herrero, Ignasi Guardans and Carl B Hamilton Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 28, 2018
Read article More on this topic

Blog Post

China’s strategic investments in Europe: The case of maritime ports

The EU is currently working on a new framework for screening foreign direct investments (FDI). Maritime ports represent the cornerstone of the EU trade infrastructure, as 70% of goods crossing European borders travel by sea. This blog post seeks to inform this debate by looking at recent Chinese involvement in EU ports.

By: Shivali Pandya and Simone Tagliapietra Topic: Global Economics & Governance Date: June 27, 2018
Read about event More on this topic

Past Event

Past Event

EU-LAC Economic Forum 2018

The second edition of the EU-LAC Economic Forum, a high level gathering for in-depth research-based exchanges on economic issues between European, Latin American and Caribbean (LAC) policy makers and experts.

Speakers: Angel Badillo, Federico Bonaglia, Maria Demertzis, Sylvie Durán, Guillermo Fernández de Soto, Alicia García-Herrero, Elisa Grafulla, Gonzalo Gutiérrez, Bert Hoffmann, Juan Jung, Emilio Lamo de Espinosa, Carlos Malamud, J. Scott Marcus, Neven Mimica, Fabio Nasarre de Letosa, Detlef Nolte, Anne Sperschneider and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 26, 2018
Read about event More on this topic

Past Event

Past Event

State of transatlantic trade relations

A conversation on transatlantic relations with Michael Froman.

Speakers: Michael Froman, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 21, 2018
Read article More on this topic More by this author

Blog Post

Demographics and Long Run Growth

Scholars have been investigating the relationship between demographics and long term growth, in the context of the secular stagnation hypothesis. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: June 18, 2018
Load more posts