Wednesday, May 13, 2009

Reform or crisis management?

Interviewing Robert Triffin in 1985 in his room at the University of Louvain-la-Neuve.

Last week I gave a speech at a conference in Louvain-la-Neuve (7-8 May 2009) in which I advocated fundamental reform of the international monetary system. In my speech, "Why should we have listened better to Robert Triffin?", I refer to the March 2009 plea by China's central banker Zhou Xiaochuan to create a new global reserve currency replacing the dollar and I remind that three years earlier Fan Gang, member of the Monetary Policy Committee of China's central bank and member of the Fondad Network, made a similar plea in his contribution to the Fondad conference and book Global Imbalances and the US Debt Problem: Should Developing Countries Support the US Dollar?

At the end of my speech I discuss the likelihood that the world's policymakers will finally adopt and implement a fundamental reform of the international monetary system in an updated version of the Triffin Plan or any other plan that departs from the same basic idea that we need a truly international global reserve asset as key currency of the system.

Given the reactions by US, European and Japanese policymakers to the Chinese and Russian proposals I expect that the process of reform will be slow. Let me quote the end of my speech:

US policymakers, Japanese policymakers and a few European policymakers immediately reacted to the news about the need for "a new global currency" by saying that a fundamental reform that implied replacing the dollar was neither necessary, nor likely in the near future. A number of academics and columnists said the same. But the UN Commission headed by Stiglitz advocated fundamental reform of the international monetary system, and so did the Italian minister of economy, Giulio Tremonti, recently, according to news agency Reuters (30 April). So, is reform about to take place?

I don't think so. The power groups and interest groups opposing fundamental reform of the international monetary system are still strong. The routine of the bureaucrats and bosses in both official and private institutions is likely to prevent action. The policymakers of the NATO countries - with the exception of Italy ? - do not seem to be eager starting a process of negotiating a new monetary system that replaces the dollar as key currency of the system. The Europeans rather prefer to maintain the dollar and improve financial regulation.

Does the old dream of Robert Triffin remain a dream, a utopia?

My hope is that Triffin's dream will become true. The problems of the current system (its instability, its proneness to crisis, its unfair treatment of developing countries) are too big to let them drag on. We should not wait with reform until the next crisis emerges because the costs are too high. It would also be proof of low intellectual quality of our policymakers, and of low intellectual quality of the academics working with them, if they would let drag on the system as it is. Why should they not change it?

I'd like to end my talk with an encouraging quote from Triffin. When I interviewed him in 1985 for the Dutch and Belgian magazine Intermediair, I asked him if he was never accused of being naïve by still believing in the possibility of reforming the international monetary system. "Yes," he answered frankly.

- And what is your reaction to this reproach? I asked.

'Well, I give the answer Ben Gurion once gave: to be realistic today you need a great deal of utopia. Running away from the most obvious solutions is not realism. It's crisis management, condemning you to more and more crisis management."