What is an international monetary system (IMS)?
The term "international monetary system" is used to describe the mechanisms and institutions that organise and regulate international monetary exchanges, as well as foreign exchange systems.
In history, there have been various systems, including the compensation system, various forms of the gold standard, and the floating currency system.
After the stock market crash of 1929 and the following monetary conflicts, there was an urgent need for enhanced international cooperation on monetary policy. This took the form of the Bretton Woods agreements and the introduction of a fixed but adjustable foreign exchange system regulated by the International Monetary Fund (IMF). The abandonment of the gold standard in 1971 paved the way to a less regulated system in which floating exchange rates and fixed but adjustable rates co-existed.
The recent financial and economic crisis raises the issue of the reorganisation of the current international monetary system.
Why reform the current international monetary system?
Recent events have highlighted deficiencies in the IMS that may play a role in weakening the world economy:
1. Increased volatility of exchange rates: this volatility creates uncertainty for both households and businesses in terms of economic decision-making. This can be seen in the recent fluctuations of the euro-dollar rate (in July 2008, one euro was worth $1.60, and today the euro is worth roughly $1.30), as well as in fluctuations of the Brazilian real, whose value rose by 29% against the dollar between January 2009 and January 2011.
2. Accelerated inflows and outflows of capital: these capital flows encourage liquidity crises, which have strong repercussions for the entire economic fabric. The emerging countries are hardest hit by this phenomenon: between 1990 and 2010, they had to deal with 42 sudden stops of capital inflow.
3. The risk of a "currency war": given this monetary instability, certain States have been tempted to conduct non-cooperative economic and exchange rate policies. Such strategies are detrimental to the entire global economy.
4. Increasing macroeconomic imbalances: between 1998 and 2007, total deficits and surpluses of G20 countries rose from $580 billion (2.3% of G20 GDP) to $2.5 trillion (5.6% of G20 GDP). As a proportion of global wealth, balance of payment imbalances have thus doubled. The current international monetary system does not allow the spontaneous reduction of these imbalances, which weaken global growth.
How shall the IMS be reformed?
In 2010, the G20 committed to working towards a more stable, more resilient IMS.
The French presidency will propose that the G20 take action in the following areas:
1. Reinforcing macroeconomic policy coordination via the Framework for Strong, Sustainable and Balanced Growth -- the G20's macroeconomic policy surveillance tool. In 2011, the G20 countries must find a common yardstick for measuring global imbalances, in the form of guidelines for more clearly identifying those imbalances that are unsustainable. Before the end of the year, each country will commit to adapting its economic policies in order to rebalance global growth and make it stronger and more solid.
2. Reducing the need for reserve accumulation to deal with crises. This involves reinforcing the IMF's tools for helping countries that are vulnerable to liquidity crises. We must also boost the coherence and the complementarity of regional and international liquidity crisis management facilities.
3. Encourage stable capital flows to finance growth and development: as chair of the G20, France will propose that the IMF be given oversight authority in this area, which it does not have under its current Articles of Agreement. This could take the form of multilateral rules that encourage free movement of capital, but which allow States to intervene in cases of massive in-and outflows of capital.
4. Providing support for the internationalisation of emerging currencies, which is a reflection of new global economic balances as well as the increasing presence of the major emerging countries. This would involve support for the internationalisation of the currencies of the major emerging countries. Several possible courses of action will be discussed: modifying exchange rate regimes, and more cooperative management of currency reserves. The French presidency will also introduce discussions of the role of Special Drawing Rights (SDR), an international reserve asset created by the IMF, as well as of changes to the basket of international currencies that make up the SDR and the timeline for such changes.
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