Towards a World Reserve Currency
On the 14th of May 2010, an International Colloquium on the Initiative Triffin 21: “Towards a World Reserve Currency”, organized by the Triffin International Foundation1 in co-operation with the Compagnia di San Paolo2, took place in Turin (Italy) and gathered policy-makers, central bankers and economists from all over the world.
The Initiative Triffin 21 was launched by the Triffin International Foundation, chaired by Alexandre Lamfalussy, with the aim to contribute to the debate on the reform of the international monetary system. The first step of the Initiative was a lecture given by Tommaso Padoa-Schioppa on “The ghost of bancor: the economic crisis and global monetary disorder”3 at the University of Louvain-la-Neuve last February. The international colloquium in Turin was the second step of the initiative, with the objective of bringing together different views of scholars and policy-makers, all united by the will of developing a multilateral approach to international economic and monetary issues.
The colloquium focused on two areas which constitute the necessary premise of any reform proposal: on the one hand, the analysis of the non-sustainability of the present monetary arrangements as a systemic root of the current crisis, and, on the other hand, the identification of the rules and requirements of a stable international monetary system.
On the first point the discussion was based on the recognition of the persistence of the so-called “Triffin dilemma”. Triffin, back in 1960, identified a flaw at the basis of the use of a national currency, namely the US dollar, as the international reserve currency, basically linked to the impossibility to reconcile the external equilibrium of the US with the creation of an amount of international liquidity sufficient to support the development of international trade. The symmetrical growth of the deficit of the US balance of payments on the one hand and the accumulation of reserves in the emerging countries on the other hand, experienced in the last decade and generally considered one of the problems at the heart of global imbalances, resulted in a net transfer of funds from the developing countries to the developed ones: in other words, the developing countries’ savings were financing the developed countries’ expenditures.
After the collapse of the Bretton Woods system, the global economy was left without any monetary order: exchange rates were left to the market and, even without a formal global arrangement, the dollar became the international reserve currency. In a sense, after the gold exchange standard and the dollar standard, we have experienced a “fiduciary dollar standard”. This monetary “non-system” was the result of individual countries’ choices and it gave rise to a broad and bizarre combination of exchange rate regimes, ranging from monetary unions and hard pegs to freely floating rates.
Currently, there is no adjustment mechanism of global imbalances nor there is a stable anchor for the monetary policy stance of the global standard’s issuer. Furthermore, there is no international authority empowered to adopt coordinated (domestic) measures to address the problem.
During the discussion in Turin there was a common acknowledgement that the lack of a monetary anchor with a universally accepted rule and the lack of a mechanism able to ensure the global consistency of national objectives has brought about a recurrent systemic instability with large fluctuations of the exchange rates, repeated episodes of currency and financial crises in the emerging markets and a sharp widening of current account imbalances. Furthermore, in the long run it cannot be politically acceptable and economically sustainable that developing and emerging countries transfer funds to the industrialized ones, while still under-represented in international institutions.
On the second point about the desirable requirements of a stable international monetary system, the considerations emerged during the colloquium pointed to the ruling out of the two extreme solutions: worldwide flexible exchange rates or fixed exchange rates. Both options appear to be unrealistic and undesirable. The former option would be destabilizing, as it would require a fully efficient market reacting to disequilibria in the fundamentals. The latter implies to give up capital mobility and establish a single world monetary policy, namely a transfer of sovereignty from the national level to the international level, that appears to be politically impossible in the foreseeable future.
If the possible solution is not simply one of the above mentioned extremes, other options need to be considered which allow for gradual adjustments aiming at incremental solutions, rather than sharp turns.
During the colloquium, a number of requirements for a future and more stable monetary system were expressed, namely:
- the presence of rules (and incentives) that impose some form of discipline on national economic policies, that are now left to the market only;
- the presence of a global anchor to stabilize inflation expectations. This would replace the use of the US monetary stance, which is determined on national parameters and needs, as a global stance;
- the need to find a solution to the issue of the global (mis-)matching of demand and supply of reserves and to the diversification needs;
- the participation of the emerging countries to the definition of possible solutions and the need to answer to their request for a stronger representation.
Starting from these points, some hints about possible future actions and configurations of the international monetary system looking ahead were put forward.
Particular reference was made to the proposal of the Governor of the People’s Bank of China, Zhou Xiaochuan, who, in March 2009, put forward a plan for the use of the SDRs issued by the IMF as a supra-national reserve currency. His proposal included a number of desired reforms, including the need to review and broaden the composition of the SDR basket4.
In line with this proposal, a number of measures have been discussed during the meeting in Turin to support the adoption of the SDRs as international reserve currency, consistent with the demand in the international settlements and payments for trade and finance. It is worth noting that there are some obvious similarities between some proposals for the development of the SDR and the European experience with the development of the ecu.
The first step indicated is linked to the need to make the SDR fully convertible. The IMF and all its members could sign a pact in which they agree to make the SDR fully convertible, which means that a member can exchange the SDR currency mix into a “real” SDR and vice versa. It has also been argued that, in revisiting the composition of the SDR basket, it should be kept in mind that all the currencies included in the basket should be fully convertible.
Secondly, SDR payments and settlements need to be made legal in every IMF member country. There should be a settlement system between the SDR and other currencies, and the BIS (or the IMF itself) could act as the international SDR settlement bank.
On the other hand, it is not perceived as necessary to back the SDR with commodities, as it is already the case for national currencies, and the SDR could coexist with national/regional currencies, which means that each country can continue to enjoy a relevant degree of independence in its monetary policy.
Since the use of the SDR as the internationally accepted reserve currency implies the overcoming of the drawbacks currently linked to the SDR, as it was invented by the governments, and the achievement of a critical mass, it is unrealistic to rely on the private market only. On the contrary, there is common acknowledgment that there must be an organized and top-down approach by the governments. Then, also market players could perceive the SDR as an opportunity, notably as a sort of global hedge due to its basket’s composition. Therefore, it is essential that world leaders are convinced that this process is in the interest of both the international system and individual countries.
However, before looking at possible solutions and actions to put in place, it is essential to reach a wide consensus on the two points discussed during the meeting, i.e. the non-sustainability of current global monetary arrangements as sources of systemic instability and imbalances, and the requirements for a more stable monetary system. With this aim in mind, the next step of the Initiative Triffin 21 consists in the stimulation and collection of studies and researches from economists and experts from all over the world, in order to formulate recommendations for national and international policy-makers.
1 A foundation established in the 1990’s to preserve the intellectual heritage of the Belgian/US economist Robert Triffin and to address the new problems of our global economy in light of his ideas.
2 An Italian foundation with a strong focus on European and international issues.
3 The full text is available, in English and French, on the website of the Triffin International Foundation http://www.uclouvain.be/fondation-triffin.html
4 The SDR basket now includes only the US dollar, the euro, the Japanese yen and the British pound and its next review is scheduled for end 2010.