Austerity - Who is right, who is wrong?

A year before I established the Forum on Debt and Development in 1987 I wrote in the magazine Alternatives, 'Today there is probably no other area of human concern that affects more deeply the living conditions of people all over the world than that of international finance. Nevertheless, the main policy-making in this field is in the hands of an amazingly small group comprising central bankers and finance ministers in the rich countries, heads of international organizations such as the International Monetary Fund and big commercial bankers. The opinion of people outside this charmed circle of financial managers is hardly ever taken into account. This is a pity, since economic policy-makers tend by both temperament and training to be rather narrow-minded; their thinking moves in a groove.'

In the trailer of the film The Visitor shown above, it is said that 'You can live your life and never know who you are until you see the world through the eyes of others.' The film is not about the narrow-mindedness of a banker or a finance minister but of that of a university professor who drops into his standby New York flat one night, only to find that a young couple has been renting the place from a scam artist. Instead of having them arrested, the professor befriends his naive squatters - a Syrian jazz drummer and a Senegalese jewelry maker - who then get a chance to teach him about passion, playing the djembe, and post-9/11 immigration policies. As the professor fights to keep one of his new friends from being deported, his own world opens up.

Narrow-mindedness is a general human phenomenon, and not an exclusive quality or propensity of finance ministers and bankers. And obviously, not all finance ministers and bankers are narrow-minded. Johannes Witteveen, for example, a former finance minister and head of the IMF, is not narrow-minded. Nor is Tommaso Padoa-Schioppa (see my previous post), also a former finance minister and board member of the European Central Bank. Nor is Andrew Sheng, another former central banker who is part of the FONDAD Network (see for his views many of my previous posts on this blog).

A few days ago I saw an animated cartoon video explaining today’s crisis in simple terms. It’s a bit fast, and you may like it, or dislike it. The explanation is based on a lecture given by a real university professor (opposite to the acting professor in The Visitor), David Harvey, whom you may also like or dislike. But the issue is that this video, and the lecture on which it is based, show on the one hand the attempt to make things clear that seem to be too complicated for the non-expert, and, on the other, the attempt or tendency to present explanations as if they are ‘reality’.

This brings me to the topic of this post: Who should we believe, those who preach austerity as a key ingredient for managing the crisis, or those who criticize austerity as being the remedy?

Austerity was for a long time a taboo word in France, but even there it is now elevated to official ‘wisdom’. So now we have policymakers in the rich countries, except the United States, propagating austerity saying it is urgent and inevitable, while a few economists are criticising austerity saying it is a silly thing to do as it creates, rather than solves, problems. The critics include Paul Krugman (we live in a US-dominated academic and financial world, in which Krugman’s words are echoed daily in almost every corner of the globe), Joe Stiglitz (same story), Martin Wolf (less known, except to readers of the Financial Times), and Robert Skidelsky (who knows him?) – to name a few of the critics (there are many more including those who criticise in a more fundamental way the power system and the power policies).

I will nor repeat or try to summarise the debates on austerity that are raging on, but instead focus on one element in them that is crucial: who is right, who is wrong?

The answer to that question depends on what you believe in. Or it depends on what you think the causal relationship is between, for example, austerity and gaining confidence of financial markets, or between austerity and addressing the fiscal debt problem, or between austerity and the resumption of growth. Or between austerity and the reduction of unemployment, or any other relationship you can think of.

Can those ‘causal’ relationships be established unambiguously? I don’t think so. There are other factors, other variables, at play. It is difficult to isolate any and each of these factors or variables – such is reality economists (and others) are dealing with. Moreover, this ‘reality’ is sensitive to human beliefs, practices, routines, power relationships, power dynamics, economic doctrines, political and economic ideologies, interest groups, government or market intervention (both governments and markets are determined by human action and thinking) and what else you have in the global economy.

If we cannot establish causal relationships in an unambiguous manner, what do we do? To repeat my question: Who should we believe, those who preach austerity as a key ingredient for managing the crisis, or those who criticise austerity?

I am afraid we can do no other thing than search for the best or most convincing or most challenging answers by exploring the given reality, or envisioning a possible different reality. For this, an attitude is needed of ‘seeing the world through the eyes of others’.

Such empathy and open-mindedness (and curiosity) would help to understand better the economic ‘reality’ we are living in. Obviously, empathy is needed with the needy and not with the greedy.

In the 1987 Alternatives article mentioned above I quoted Robert Triffin who said that 'the economy is far too serious a thing to be left to the economists'. I still believe that the living conditions of people all over the world are too important to be determined solely or mainly by financial policymakers.

Moreover, as I explained in a speech about Robert Triffin last year, I still believe that a fundamental reform of the international monetary system is needed to solve the crisis instead of just managing it. Unfortunately, the debate on the need of reform is much less prominent than the debate on austerity. Jane D'Arista and Korkut Erturk have written recently a very good paper on the need and ways to reform the international monetary system which you can read by clicking here.

Padoa-Schioppa: "The attackers will return"

Friends can turn into enemies. For many years governments and financial markets were close friends, governments giving the markets the freedom to do almost whatever they wanted and helping them when the credit crisis erupted. But in recent times that friendship is less obvious even though, or exactly because, markets continue to enjoy the same freedom -- and power.

Reflecting on the attacks over the past months by financial markets on Greece and other south European countries and the euro Tommaso Padoa-Schioppa, a former Italian finance minister and member of the executive board of the European Central Bank, has accused the financial markets of behaving like an invading army. He did so in an article published in the Financial Times of 13 May 2010.

Let me quote the first three paragraphs of Padoa-Schioppa's article:

'Over many months, a mighty army has advanced on the citadel of the European currency with the cry: “It will never work!” The army was quick and single-minded, the citadel slow and divided. The besiegers were thousands, steeled by convictions all the more fervent for their extreme simplicity. Their reasoning was as follows: the euro area is not a political union and can never become one, because Europeans have no appetite for it and nation-states will not relinquish power. The citadel, therefore, is doomed to capitulate and its stubborn resistance merely serves to create profit opportunities for astute traders.

Equally strong and simple was the credo of the defenders, who countered: “It can work!” For years, Europe’s heads of government and central bankers had preached that a currency without a state is a smart invention that can last forever. It accomplishes the miracle of removing monetary and trade tensions, while allowing the nation-state to remain the unique master. The Maastricht treaty of 1992 was the final step in the construction of the European edifice. No other transfer of sovereignty will, nor needs to, occur. The European Union can do without the ordinary fiscal, financial and monetary instruments that all textbooks prescribe.

Enemies as they are, the two camps share the same prime article of faith: that the nation-state is and will continue to be the absolute sovereign within its borders. Both believe that international relations will continue to be based on the twin postulates of internal homogeneity and external independence, a model invented by the Treaty of Westphalia of 1648.'

And let me quote the last paragraph of Padoa-Schioppa's article:

'The attackers will return. The outcome will, for sure, be decided by the rivals’ relative strength, but also by the nobility of the cause they fight for. The army is formidable but it bets on the wrong cause: a return to the old world of flexible exchange rates, where each country deludes itself that it can be insulated from its neighbours and tries to foster growth through competitive devaluations, reneging on debts when it sees fit. This can only produce economic misery, conflict and dangers for global security. The citadel fights for the good cause (saving Europe’s monetary union), but its persistent credo, which has for too long kept it disarmed, still hinders it from going all the way with the necessary reform. At stake in this struggle, ultimately, is the ideology of the omnipotent nation-state.'

Padoa-Schioppa's article prompted Andrew Sheng, a former deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission, to write a 2-page comment. Let me also quote from his comment the first three paragraphs:

'The recent Greek debt crisis has brought into the fore the conflict between two major philosophies. One the one hand, there is the nationalists who believe that the nation-state will remain dominant in the new world order. On the other, there is the free market fundamentalists who believe that markets have changed the world into a borderless market space, whereby the market has more power than the state. Indeed, the market space camp laugh at the old guard, especially those bureaucrats who still think that the state remains more powerful than markets.

The reason why I bring this up is that one of the foremost thinkers behind the European Monetary Union, Tommaso Padoa-Schioppa, former Minister of Finance in Italy and former member of the European Central Bank, has recently written about the defense of the citadel of Euro against the army of market speculators who think that “the euro area is not a political union and can never become one, because Europeans have no appetite for it and nation-states will not relinquish power”. Who are the attackers? Mr Padoa-Schioppa identifies them as the army, whose “battalions were thousands of dealing rooms, connected into a global network acting round the clock. Its targets were selected by the intelligence of three rating agencies. Its morale was sustained by an unwavering faith: that we, the market, are those who know best.”

Who are the defenders? The European Union and the member state bureacrats, who are determined to regulate the market and bend the market to the dictats of the state. The Euro as a currency cannot be allowed to fail. On the other hand, the army of market traders think that “the citadel, therefore, is doomed to capitulate and its stubborn resistance merely serves to create profit opportunities for astute traders.”'

And let me quote another three paragraphs in one of which Sheng describes the financial market traders as "the very beasts that they [the governments] have rescued":

'In plain language, we cannot sacrifice the common good to the individual greed of market traders. But he or I have not appreciated that this generation of market traders were creatures of our own creation. A whole generation of fund managers, investment bankers and even retail traders have grown up in the last 20 years, feeding on the food chain of growing asset bubbles, precisely because central bankers and ministries of finance have allowed the markets to win with huge moral hazard. If markets quiver, the central bankers have lowered interest rates in Greenspan puts or ministries of finance have taken private sector losses into public books through total fiscalization or nationalization of bank deposits and losses.

The result is that I realized that these hordes of institutional investors, fund managers, analysts, and researchers, many of whom are dedicated professionals and my personal friends, have collectively become a mob that thrives off volatility and momentum. The level of bonuses and rewards are such that they all seek the instant analysis of complex information and if the thundering herd moves in one direction, they win. If they lose, the public pays. The agents of fiduciary trust have become the masters of the game. The regulators and state bureaucrats are still under an illusion that they are in charge.

The sad part of the current defense of the Euro is that I think that the EU bureaucrats are defending an imaginary Maginot Line, where the fiscal breaches are larger than they think (or they think they can plug). This is not to say that I think that they are wrong to defend, but that their tools and techniques are obsolete, because they are trying to defend by succouring the very beasts that they have rescued. Those who try to make the fiscal debt sustainable by keeping interest rates low are pouring ammunition to the attackers, whose carry trades thrive on low interest rates. The larger the guarantees for states and banks that are not viable, the more the ammunition that will be used to speculate against the Euro and to create arbitrage opportunities.'

In this battle, and other battles between governments and financial markets, citizens are mere watchers of the game. Unfortunately, they are the ones paying the costs.

Austeridad - ¿Quién tiene razón, quién está equivocado?

Un año antes de establecer el Foro sobre Deuda y Desarrollo en 1987, escribí en la revista Alternativas, "Hoy en día probablemente no hay otra área de actividad humana que afecte más profundamente las condiciones de vida de personas en todo el mundo que el de las finanzas internacionales. Sin embargo, la formulación de políticas en este campo está en manos de un grupo increíblemente pequeño que comprende los banqueros centrales y ministros de finanzas de los países ricos, los jefes de organizaciones internacionales como el Fondo Monetario Internacional y los grandes bancos comerciales. La opinión de la gente fuera de este círculo mágico de los gestores financieros casi nunca es tomada en cuenta. Es una lástima, ya que los responsables de la política económica tienden tanto por temperamento y formación a ser más bien estrechos de miras, su pensamiento se mueve en una ranura.

En el trailer de la película The Visitor se dice que "Se puede vivir su vida y nunca se sabe quién es hasta que vea el mundo a través de los ojos de los demás." La película no es acerca de la estrechez de miras de un banquero o un ministro de finanzas, sino de la de un profesor universitario que una noche entra en su apartamento en Nueva York para descubrir una joven pareja que ha estado alquilando el lugar de un estafador. En lugar de hacerlos arrestar, el profesor se hace amigo de sus ocupantes ingenuos - un baterista de jazz de Siria y un artesana de joyas de Senegal - que luego tienen la oportunidad de enseñarle acerca de la pasión, tocar el djembe, y post-9/11 políticas de inmigración. Mientras el profesor lucha para prevenir la deportación de uno de sus nuevos amigos, su propio mundo se abre.

La estrechez de miras es un fenómeno humano general, y no una cualidad o propensión exclusiva de los ministros de finanzas y banqueros. Y, obviamente, no todos los ministros de finanzas y banqueros son de mente estrecha. Johannes Witteveen, por ejemplo, un ex ministro de Hacienda y jefe del FMI, no es de mentalidad estrecha. Tampoco lo es Tommaso Padoa-Schioppa (ver mi post anterior), también un ex ministro de Hacienda y ex miembro del directorio del Banco Central Europeo. Tampoco lo es Andrew Sheng, otro ex banquero central que forma parte de la Red FONDAD (véase, por sus puntos de vista muchos de mis posts anteriores en este blog).

Hace unos días vi un vídeo de dibujos animados que explica la crisis actual en términos sencillos. Es un poco rápido, y es posible que les guste, o no les guste. La explicación se basa en una conferencia dada por un profesor universitario real (en vez del profesor actuando en The Visitor), David Harvey, quien también les guste o no les guste. Pero la cuestión es que este video, y la conferencia en la que se basa, muestran por un lado el intento de aclarar cosas que parecen ser demasiado complicadas para los no expertos, y por otro, el intento o la tendencia de presentar explicaciones como si fueran "realidades".

Esto me lleva al tema de este post: ¿A quién debemos creer, a los que predican la austeridad como un ingrediente clave para la gestión de la crisis, o a los que critican la austeridad como el remedio?

Austeridad fue durante mucho tiempo una palabra tabú en Francia, pero incluso allí ahora es elevada a "sabiduría" oficial. Así que ahora tenemos gobernantes promoviendo políticas de ajuste en los países ricos, a excepción de Estados Unidos, diciendo que la austeridad es urgente e inevitable, mientras que algunos economistas critican la austeridad diciendo que es una tontería aplicarla ahora porque crea, y no resuelve los problemas. Los críticos incluyen a Paul Krugman (vivimos en un mundo dominado por académicos y financieros de los Estados Unidos, en el que las palabras de Krugman se repiten a diario en casi todos los rincones del mundo), Joe Stiglitz (la misma historia), Martin Wolf (menos conocido, con excepción de los lectores del Financial Times), y Robert Skidelsky (quien lo conoce?) - por nombrar algunos de los críticos.

No repetiré ni trataré de resumir los debates sobre la austeridad que se están llevando a cabo, pero me centraré en uno de los elementos cruciales: ¿quién tiene razón, quién está equivocado?

La respuesta a esa pregunta depende de lo que uno cree, o depende de lo que usted piensa qué es la relación causal entre, por ejemplo, la austeridad y ganar la confianza de los mercados financieros, o entre la austeridad y abordar el problema de la deuda fiscal, o entre la austeridad y la la reanudación del crecimiento. O entre la austeridad y la reducción del desempleo, o cualquier otro tipo de relación que se pueda imaginar.

¿Pueden estas "relaciones causales" ser establecidas de forma inequívoca? No lo creo. Hay otros factores, otras variables, en el juego. Es difícil aislar cualquiera y cada uno de estos factores o variables - esta es la realidad que los economistas (y otros) están tratando. Por otra parte, esta "realidad" es sensible a las creencias humanas, las prácticas, las rutinas, las relaciones de poder, la dinámica del poder, las doctrinas económicas, las ideologías políticas y económicas, los grupos de interés, la intervención de gobiernos y mercados (tanto los gobiernos como los mercados están determinados por la acción humana) y cualquier otra cosa que se tiene en la economía mundial.

Si no podemos establecer relaciones causales de manera inequívoca, ¿qué hacemos? Para repetir mi pregunta: ¿A quién debemos creer, los que predican la austeridad como un ingrediente clave para la gestión de la crisis, o los que critican la austeridad?

Me temo que no podemos hacer otra cosa que buscar las respuestas más convincentes o más desafiantes mediante la exploración de la realidad dada, o imaginando una realidad diferente. Para ello, es necesaria una actitud de "ver el mundo a través de los ojos de los demás."

Tal empatía y apertura de espíritu (y curiosidad) ayudaría a comprender mejor la "realidad económica" en que estamos viviendo. Obviamente, la empatía que se necesita es con los necesitados y no con los codiciosos.

En el artículo de 1987 en "Alternativas" mencionado anteriormente, he citado a Robert Triffin diciendo que "la economía es algo demasiado serio como para dejarlo en manos de los economistas." Sigo creyendo que las condiciones de vida de gentes en todo el mundo son demasiado importantes para ser determinadas exclusiva o principalmente por los gobernantes de las políticas financieras.

Por otra parte, como lo expliqué en una conferencia sobre Robert Triffin el año pasado, sigo creyendo que una reforma fundamental del sistema monetario internacional es necesaria para resolver la crisis en lugar de limitarse a su gestión. Desgraciadamente el debate sobre la necesidad de la reforma es mucho menos visible que el debate sobre la austeridad. Jane D'Arista y Korkut Erturk han escrito recientemente un artículo muy bueno sobre la necesidad y la manera de reformar el sistema monetario internacional que se puede leer haciendo clic aquí.

PS1: Pinchando los enlaces salen textos en un mal castellano que, de origen, son en inglés. En el texto original de este post (en inglés), que se puede ver en la entrada más arriba, o pinchando aquí, los enlaces dan acceso a los textos originales en inglés.

PS2: Este post no es del 26 de febrero sino del 23 de julio 2010. Lo publiqué en un viejo post borrador.

"Please send a Christmas card to Wall Street bankers"

Early in the morning I tend to begin my day with reading articles from the media in France, Malaysia, UK, Deutschland, España, Estados Unidos (in Spanish), US, Brasil, Chile, South Africa, Nederland.

Then I use certain key words (such as 'global currency', 'international monetary reform' and 'carry trade') to do a "Search News" in various languages, which provides me with more interesting articles from various websites including the press agencies.

When I find an article interesting, I send it to myself and, when I think it might be of interest to one or more members of the Fondad Network (the picture above is of one of them, Charles Wyplosz, and the picture below of another, Andrew Sheng), I send it to them as well, highlighting a few paras or quoting the article fully, and raising a question.

Based on these articles an interesting discussion may develop between a few members of the Fondad Network (which is larger than the one included on the Fondad website), and if I think the discussion is of interest to the larger Fondad group, I send it to them too.

It would take me too much time to report on these discussions in this blog -- as I have done sometimes in the past. However, I'd like to share with you a few thoughts that were exchanged recently about zero-interest rate policy (ZIRP).

The discussion started with an article I sent around in which it was argued, "by pegging interest rates at zero percent, the Fed is inflating speculative bubbles worldwide [including China]".

This prompted Charles Wyplosz to say that this statement was not only totally misguided reasoning but also very dangerous. "The Fed deals with US economic and financial conditions, which are weak enough to justify very low interest rates. The impact on China only exists because the Chinese authorities have decided to peg the RMB to the dollar," he stressed.

Andrew Sheng responded, "Charles, who is really being helped by the low interest rates? I can understand why the real sector needs zero interest rates but the 30 year fixed rate mortgage is still 5% per annum, more in real terms. The real winners are the bankers who pay themselves massive bonuses on the back of government guarantees and subsidies from the central banks and then depositors around the world."

Charles Wyplosz retorted, "Assuming that the zero interest rate policy has the effect that you describe, and only that effect, it is redistribution within the US, something that is striclty a US issue. It has no bearing whatsoever on China's monetary policy."

Subsequently, I sent around an article by Andrew Sheng, "A year in crisis - who pays?", in which he says:

"Thanks to the zero interest rate policies, the world is one big carry trade and emerging markets are very bubbly.

Investors are now once again caught between greed and fear. Greed drives a lot to join the momentum play, fear rising as prices go higher and higher. (...)

It is not surprising that the world is schizophrenic about both deflation and inflation.

Economists like Paul Krugman and Nouriel Roubini are in the camp of deflation, whereas investors like George Soros and Warren Buffett are signaling that they are worried about inflation.

Of course, for those with lots of debt, inflation would be welcome because that inflates away the real value of the debt. For those savers whose returns are not higher than the inflation rate, they will share the burden of the inflation tax.

What is quite clear is that most of the world is going to pay for this crisis. So, please send a Christmas card to those Wall Street bankers who are enjoying record bonuses to remind them that all of us are paying for their party."

If you want to read the full article by Andrew Sheng, the link is here.

Macro-prudential regulation

Avinash Persaud sent me some thoughts about macro-prudential regulation which are worth reading (again). Here is what he says:

The counter-revolution begins: the rise and premature fall of macro-prudential regulation

An early consensus to emerge from the wreckage of the global financial system was that in addition to the old, we needed a new type of regulation: macro-prudential regulation. This became so readily accepted, at a time when policy makers were ready to accept almost anything that appeared to be affirmative action, that the term, “macro-prudential regulation”, quickly became a cliché: over-used and poorly understood. So poorly understood, it now appears, that despite much talk of the need for macro-prudential regulation and its cousin, “systemic risk regulation”, it is actually hard to find any detailed macro-prudential regulation in the US Administration’s White Paper. Bank of England Governor, King, has also pointed out that despite being given broader responsibility for systemic risk by the UK Government, he has not yet been given any macro-prudential tools to achieve it.

The term macro-prudential regulation was probably first used in the late 1980s by Andrew Crockett, former General Manager of the Bank of International Settlements. In more recent years his colleagues at the Basle-based BIS, in particular, Bill White and Claudio Borio, championed the idea along with some policy officials –it may be unhelpful to them to identify them by name - and macro-economists like Charles Goodhart, Jose-Antonio Ocampo, myself and others. The point of macro-prudential regulation is that financial firms acting in an individually prudent manner may collectively create systemic problems. Macro-prudential regulation is a response to a failure of composition problem: we cannot make the financial system safe, merely by making every financial institution and product safe.

Proposals to improve the regulation of firms, products and markets - contained in the US Administration’s White paper - are generally a good thing, but they are not macro-prudential. Moreover, these proposals neglect the critical observation that we have spent the last 20 years tightening up micro-prudential regulation and yet financial crashes are just as deep if not more so and they do not occur randomly, which a failure of a rogue firm might imply, but always follow booms. This boom-bust cycle implies there is something “macro” going on we need to address urgently.

A common source of macro-prudential risk is common behaviour by financial firms - often as a result of closer adherence to tougher micro-prudential rules. During booms, asset prices rise and measured risks fall. Acting prudently, financial firms will feel it is safe to expand lending. All financial firms expanding together will lead to a scramble for assets that will create, post-hoc, excesses in valuations and lending. During the resulting crashes asset prices collapse temporarily and measured risks soar. In “Sending the herd off the cliff edge” (IIF, 2000) I showed how all financial firms responding to common prudential, market-based risk controls, would lead them to want to sell the same assets at the same time, creating a liquidity black hole.

Macro-prudential regulation is about encouraging different behaviour than a prudent firm would follow, wherever this prudential behaviour could undermine the financial system if followed by everyone. It is rather like the paradox of saving. Individually saving is good; collectively we can have too much of it. A classic macro-prudential tool that Charles Goodhart and I have advocated is to raise capital adequacy requirements, not for all times, but specifically when aggregate borrowing in an economy or a sector is above average in an attempt to put sand in the systemically dangerous spiral of rising asset prices leading to rising borrowing to buy assets, leading to rising asset prices. This is doable as the Spanish have shown with their counter-cyclical provisioning. India could be said to have carried out macro-prudential regulation when the RBI tightened up credit conditions for lending in the housing market during the recent housing boom. Counter-cyclical measures will not end boom-bust cycles, but they may reduce their amplitude.

Another macro-prudential tool is to take a holistic approach to the financial sector and encourage certain risks to flow to places with a capacity for that risk. When the crash comes, firms that can absorb short-term liquidity risks, perhaps because they have long-term funding, are not forced to join the selling frenzy in the name of common prudential rules for all, but are more able to buy and diversify liquidity risks across time. This would forestall the implosion of the financial system that would occur if there are no buyers, only sellers.

Buried beneath the US Administration’s proposals are hints at counter-cyclical provisioning, extra capital for liquidity risks at banks and differentiated accounting, but the Paper essentially gives to much to those carrying the pitch forks in Congress who argue that what was wrong was that we didn’t have enough regulation. The brave observation is that we had too little of the right, and too much of the wrong, regulation. Doubling up existing regulation will satisfy the justifiable moral outrage against bankers that many voters feel; but it will lead to more of the same in financial boom and bust because it is insufficiently macro-prudential.

Avinash D. Persaud is Chairman of Intelligence Capital Limited, Chairman of the Warwick Commission and Member of the UN Commission of Experts and Pew Task Force on financial reform and Emeritus Professor of Gresham College.

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."

Latest unemployment figures (taux de chômage) in Europe

I am going to copy a French article with the latest figures about unemployment in the European Union provided yesterday by the statistical bureau of the EU, Eurostat. For those who do not understand French, just take a look at the figures and try to grasp to what countries they are related. (I think that for solving the world's economic problems one needs people who make an effort to understand other languages than solely their mother tongue. A few other characteristics may be needed as well.)

The issue in this blog is how the rise in unemployment is connected to the current crisis, what the main causes of the crisis are, and how they can be remedied. I will come back to that in another post. Then I will stress again the need for fundamental reform of the international monetary system. The old Plan of Robert Triffin (first developed by him already in 1957) to replace the US dollar with an international reserve currency that is not the currency of one country, has gained powerful support from the Chinese, the Russians and others.

Let's now turn to the unemployment figures:

Selon les chiffres publiés aujourd'hui par Eurostat, l’Office statistique des Communautés européennes, dans la zone euro, le taux de chômage corrigé des variations saisonnières s’est établi à 8,9% en mars 2009, contre 8,7% en février. Il était de 7,2% en mars 2008. Dans l’UE-27, il s’est élevé à 8,3% en mars 2009, contre 8,1% en février. Il était de 6,7% en mars 2008.

Parmi les États membres, le taux de chômage le plus bas a été enregistré aux Pays-Bas (2,8%) et les plus élevés en Espagne (17,4%), en Lettonie (16,1%) et en Lituanie (15,5%).

Trois États membres ont enregistré une baisse de leur taux de chômage sur un an, vingt-trois une hausse, tandis que le taux est resté stable aux Pays-Bas. Les baisses ont été observées en Roumanie (de 6,1% à 5,8% entre les quatrièmes trimestres de 2007 et 2008), en Bulgarie (de 6,1% à 5,9%) et en Grèce (de 7,9% à 7,8% entre les quatrièmes trimestres de 2007 et 2008). Les plus fortes hausses ont été observées en Lituanie (de 4,3% à 15,5%), en Lettonie (de 6,1% à 16,1%) et en Espagne (de 9,5% à 17,4%).