As chair of the Group of 20 leading economies this year, France has placed the reform of the international monetary system (IMS) high on the Group's agenda. Discussion is at a very preliminary stage, but member countries are trying to negotiate a strategy to address the compelling problem of global imbalances. To that end, the G-20 finance ministers agreed February 19 to a set of indicators that would focus "on those persistently large imbalances which require policy actions." But progress has been slow and hopes for reform in this area are clouded by difficulties.
The G-20 finance ministers set up an integrated two-step process to achieve the goal of reform. The first step is to be completed by agreeing at the next G-20 meeting in April to a set of guidelines for evaluating each indicator of such imbalances. A report by the International Monetary Fund (IMF) on its MAP (Mutual Assessment Process) is to be reviewed by the Ministers and Governors of G-20 in their October meeting. That report is to include "an action plan informed by the analysis on the root causes of persistently large imbalances based on the agreed guidelines." These agreements are the result of difficult compromises to resolve differences over specific indicators, such as the current account, the stock of reserves, or the exchange rate level.
The slow progress of recent discussions can be explained by borrowing the helpful taxonomy suggested by Edwin M. Truman, one of my colleagues here at the Peterson Institute. He distinguishes between a voluntary cooperation, which is purely discretionary and reversible, and a systemic cooperation, subjecting a country's policies to a global standard. An explicit commitment to a rule of adjustment—such as a set value for a target variable—clearly shifts cooperation from a voluntary arrangement toward a systemic one. This appears to be more than some countries are ready to accept. Understandably, such countries would resist even a partial surrendering of national objectives in favor of collective medium-term goals. Accordingly, there is not yet even a real agreement among countries on what such goals should be and on how the goals should be pursued.
This state of affairs is not particularly promising for the prospects of a far more complex process of systemic cooperation - with binding rules and enforcement mechanisms - that a meaningful reform of the IMS would require.
Why is there so much resistance to systemic cooperation? Consider the experience of the two most relevant —and successful – international monetary reforms in the last six decades: the Bretton Woods system and the less well-known European Payments Union (EPU). The common ingredients of those two reforms were: 1) a strong commitment; 2) a shared need; 3) common political ties; 4) last but not least, a leader country's supervision of the process.
While based on an American project, elaborated by Richard M. Bissell Jr., the EPU was tailored along the lines of Keynes' Clearing Union, and it functioned accordingly. The EPU's success was aided by member countries' commitment to cooperate in exchange for their participation in the Marshall Plan, with its contributions to the reconstruction of their economies. It was also helped along by their shared need to reactivate trade and payments, in the face of a dramatic shortage of dollars and gold in their reserves, and by the common objectives and mutual obligations set by the Treaty of Brussels of 1948 and the North Atlantic Treaty of 1949. Finally it was given a boost because of the leading role of the United States, which had provided the initial capital endowment to the Union and wielded political and diplomatic pressure to achieve its goal.
The Bretton Woods Agreements benefitted from similar factors. The political cohesion of the group of 44 Allied nations at the Conference of Bretton Woods was assured by the overriding need to conclude the Second World War and start post-war reconstruction. The leadership of the United States was undisputed. All these factors are lacking today.
G-20 countries face very different economic situations. Their commitment to international cooperation is weak, because their national goals are different, and sometimes conflicting. They record striking asymmetries in their per capita incomes, current account balances, and debt or credit positions vis-à-vis the rest of the world. In addition, they are in different cyclical positions. The group has different political features, partly as a consequence of their different histories and stages of development. Lastly, there is a clear lack of leadership, the essential ingredient to gather consensus and push things forward.
The international financial crisis has temporarily played an important role in establishing a more cooperative environment. As a result, governments have reinforced financial supervision; strengthened the role and the resources of the IMF; and stimulated international economic cooperation in the resolution of some of the main problems affecting the global economy. The impetus for reform is nonetheless decaying, partly because some feel that the most compelling international problems have been addressed, and because member countries are focused on their own economic problems.
The prospects are not all negative. The debate on the reform of the IMS is today more lively than ever. The continuing discussion may yet yield a stronger vision of the system's problems and to suitable solutions. One can only hope that the factors that pushed forward monetary reform in the past may be replaced today by a broader awareness of the problems and the risks of failure, and by a stronger political will by all actors to achieve a multilateral solution.