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.

Read article More on this topic
 

External Publication

Investing in China: myths and realities

Concerns are real, but the country fares as well as peers at similar levels of development. Analysis published in fDi Intelligence.

By: Uri Dadush and Pauline Weil Topic: Global Economics & Governance Date: September 20, 2021
Read article More on this topic More by this author
 

Opinion

Making supply chains more resilient

After the current global semiconductor shortage, business leaders and policymakers must think now about how to minimise the effects of future exogenous shocks on production networks and the global economy.

By: Dalia Marin Topic: Global Economics & Governance Date: September 14, 2021
Read article More on this topic
 

External Publication

EU-India trade relations: assessment and perspectives

In-depth analysis prepared for the European Parliament's Committee on International Trade (INTA).

By: Suman Bery, Sonali Chowdhry, Alicia García-Herrero and Niclas Poitiers Topic: Global Economics & Governance Date: September 10, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A Late Bloomer: where is China’s climate plan?

The world awaits China's concrete plan on carbon reduction, but the country is following its own pace.

By: The Sound of Economics Topic: Global Economics & Governance Date: September 8, 2021
Read article More on this topic More by this author
 

External Publication

What is behind China's Dual Circulation Strategy?

China's dual circulation strategy should not be dismissed as a buzzword: its implementation will entail major consequences.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 7, 2021
Read about event More on this topic
 

Past Event

Past Event

Navigating a more polarised world: policy implications

Bruegel Annual Meetings, Day 2 - Are we entering a new age in the relationship between international economics and global politics? Is Europe well-equipped for this new world?

Speakers: Hélène Rey, Jean Pisani-Ferry, Adam Tooze and Sabine Weyand Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read article Download PDF More on this topic More by this author
 

Essay / Lecture

Global asymmetries strike back

This essay addresses an old question that international relations scholars view as fundamental, but which economists regard as secondary: that of asymmetries in international economic relations.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: September 2, 2021
Read about event More on this topic
 

Past Event

Past Event

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read about event More on this topic
 

Past Event

Past Event

The future of EU-Africa relations

Bruegel Annual Meetings, Day 1 - A discussion of the state of play and outlook of EU-Africa relations.

Speakers: Masood Ahmed, Amadou Hott, André Sapir, Vera Songwe and Jutta Urpilainen Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 1, 2021
Read about event More on this topic
 

Past Event

Past Event

Resolving today’s global health crisis, and avoiding future pandemics

Bruegel Annual Meetings, Day 1- How do we exit the COVID-19 pandemic and ensure the world of tomorrow is less vulnerable to future pandemics?

Speakers: Jeremy Farrar, Amanda Glassman, Sri Mulyani Indrawati, Tharman Shanmugaratnam and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 1, 2021
Read article More by this author
 

Opinion

Why China should fear the EU's carbon border tax

Expect Beijing to soon start lobbying against the proposal.

By: Alicia García-Herrero Topic: Energy & Climate, Global Economics & Governance Date: July 26, 2021
Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Load more posts