In attempting to set out some discussion points for a reform of the international monetary system, which is characterised today by national currencies and huge global imbalances, the Palais-Royal Initiative, which I introduced in Part One, is not afraid to sketch out what it would like to see happen, even if the possibility of its suggestions coming to pass is vanishingly small. This approach was probably essential to get the Palais-Royal initiative off the ground, but leaves the reader in something of a quandary. If someone recommends a course of action you know has no chance of flying in the real world do you (a) stop listening, or (b) let the conversation continue on the basis that a worthwhile discussion may ensue?
Personally, I lean towards (a), since it is never clear to me how one pulls off the magical trick of leaping from the unreal to the real once you have both feet off the ground. It seems more sensible to begin with what can be accomplished rather than to theorise about what plainly cannot be accomplished for love or money. However, the former chairman of the Federal Reserve, Paul Volker is a large figure and since he has seen fit to put his shoulder to the Palais-Royal wheel, common sense suggests it might be interesting to see where this particular bandwagon ends up.
The opening suggestions are not promising. By this I do not mean to suggest that they are poor suggestions. They are excellent, and exactly what is needed, if you believe that a stable IMS is a good thing for the global economy. My own view is that this begs several seriously interesting questions, not least of which is the importance to be placed on national sovereignty – different nations going different ways at different speeds generate tensions in their respective currency equilibriums and it is far from clear that this can be resolved without seriously constraining some countries to the benefit of others.
This notion does not escape the Palais-Royal authors, but they figure that it will be OK to set up some kind of global oversight body that will have the power to rein in some countries and urge others to put the pedal to the metal to catch up. The ultimate aim is to have everyone chugging along at much the same speed. It’s a kind of central banker’s dream and a nightmare to anyone who doesn’t look forward to Big Government.
“… keeping national economies in order, even if a necessary condition (for IMS stability) is not sufficient to ensure global stability. Member countries’ policies, both domestic and external, interact and affect regional and global stability in ways that go beyond each country’s domestic policies and stability. Even when policies are appropriate for a country’s own stability, they may have adverse spillovers on others… Strengthened IMF surveillance over its members’ policies is therefore required.”
And since “strengthened surveillance” is not much good without some kind of enforcement power to kick recalcitrant members into line, the PRI does not shy away from the obvious corollary. The IMF needs to be given teeth:
"Strong consideration should be given to including in the surveillance framework the possibility for the IMF to impose appropriate graduated remedial actions if a country has persistently violated one or more obligations."
Making the dream a reality
The PRI authors struggle at this point to formulate quite what such “remedial actions” might consist of. They suggest a plethora of measures, including World Trade Organisation sanctions, restrictions of capital flows to countries in current account deficit and financial penalties. This is where the venture leaves the beaten path and sails off into Never Never Land. Imagine the reaction of the present US Administration if it was admonished by a beefed up IMF for policies that have the effect of weakening the dollar and launching destabilizing currency wars among emerging countries. Or imagine the reaction of the Chinese if the IMF surveillance team gave them a ticking off for artificially holding back the value of the Renminbi against the dollar and building up a huge trade surplus.
At the 2nd INET (Institute for New Economic Thinking) annual conference, held at Bretton Woods in April, one of the sessions involved a head-to-head discussion between Paul Volker and George Soros, mediated by the FT’s Gillian Tett. As it happens, Tett began the session by asking Volker what impact he thought the PRI would have. By way of answer, he told a story about an elderly colleague in the Treasury Department decades ago, when the US Treasury was doing a little work on trying to get to grips with the IMS. At the end of every brainstorming session to try to come up with ideas for improving the IMS, the gentleman would shake his head and mutter, “It won’t work”. Finally, somewhat exasperated, Volker asked him what would work. “Nothing!” the gentleman replied. “Which just about sums it up,” Volker added, to much laughter from the assembled delegates…
Further reading on the eurozone, US debt, exchange rates, geopolitics and global imbalances:
- Europe and the Euro: A Geopolitical View—An Implausible Currency but the Best Alternative to Naked Conflict? by Marko Papic
- Deleveraging, Deflation, and Rebalancing in the Global Economy by Paul Brain and Laurie Carroll
- The Tragedy of the Euro by Philipp Bagus
- New Dollar Area: The Makings of the Mess by Brian Reading
Tags: dollar , dollar debt , Financial Times , FT , George Soros , Gillian Tett , global economic policy , global economy , global imbalances , globalisation , globalization , IMF , IMS , INET , Institute for New Economic Thinking , International Monetary Fund , International Monetary System , Palais Royal Initiative , Palais-Royal , Paul Volker , PRI , Renmibi , sovereign debt , surveillance , World Trade Organisation