The overall lack of international cooperation in the field of foreign exchange rates is best illustrated by the Bank of Japan when between September and December 2010 it intervened to counter the appreciation of the yen. In the wake of the Tsunami and the meltdown at the Fukushima nuclear power plant, however, the Japanese currency is now continuing its steady decline against other major currencies. Yet, in the fall of 2010, the unilateral decision on the part of the Japanese Central Bank blatantly contradicted the statements of world political and international organization leaders according to which international cooperation and coordination at the highest level for maintaining the stability of major currencies was well established and working properly. Tokyo’s refusal to intervene in the currency markets to stabilize the yen would have been rather out of pace with trends as most governments are now covertly acting in the same manner to mitigate the downward or upward pressure on their currency value resulting from the world economy slowdown. At the height of the economic and financial crisis both G7 and G20 members urged the world’s leading economies to proceed to a general mobilization of forces in fighting the negative effects on the global economy. This time is now well gone. On the national level, the majority of senior politicians do not hide their bitter disappointment.
From the “benign neglect” of the dollar, despite the perennial statements by the U.S. Administration that “a strong dollar is in the interest of the United States,” to the intransigence of China, which continues to oppose any rapid appreciation of its currency, to Japan’s desire to weaken its own currency, and this contrary to all logic, and to European cacophony over what is the most appropriate value of the Euro, facts demonstrate that each country is in the business of defending its own national interests when it comes to currency management. The “ups and downs” in the value of a national currency against foreign currencies more than ever continues and the every man for himself approach dominates. All things considered, only a major risk of general destabilization of the international monetary system would bring about a new wave of general mobilization.
For the moment, many pundits say that there is no pilot in the world economy airplane; there is no economic hegemon able to steer the international monetary system. In fact, it is quite the opposite that is happening; there are many “pilots.” The issue of the relations between major currencies has been regularly raised during G7 past summits, whether at the level of finance ministers and governors of central banks or heads of state.
One only needs to revisit the Plaza Accord back in September of 1985, when the U.S., Japan, Germany, the United Kingdom and France jointly agreed to depreciate the U.S. dollar against the yen and the former Deutsche Mark. Another example is the Louvre Accord, reached two years later, when the United States, Japan, Germany, France, the United Kingdom and Canada joined forces to stop the free fall of the dollar. The last international cooperation of importance in terms of pressuring exchange rates involved the European Central Bank and U.S. Federal Reserve when they adopted monetary policies to support the fledgling euro in September 2000. These international interventions were more limited then previous one though. Since this time no concerted interventions in money markets has been implemented to correct the currency imbalances, and for good reason. The emergence of new economic giants on the horizon, on top of which stands China, complicates such monetary tasks.
G7 leaders today are in no position to manage the international monetary system for their own benefit. The economic and financial crisis has radically changed the international monetary landscape, and to such a degree that the G7 has lost its financial prerogatives in favor of an expanded club, the G20.
This can be illustrated by the September 2009 G20 Summit in Pittsburgh Pennsylvania which officially gave the upper hand to this new forum in terms of international economic issues. The G20 has been solidified as a “forum for international economic cooperation” on the level of heads of state. However, this expanded and more encompassing forum is not the most effective place to deal with issues of exchange rate, as they are addressed by world leaders only in dribs and drabs. World leaders are only able to “pay lip service” to pressing matters of currency exchange rates. Admittedly, the G20 summit in Toronto in June 2010 technically addressed the problem of currency rates volatility, albeit only in rose-tinted terms. G20 members have only pledged to allow for greater flexibility in exchange rates in order to effectively reflect the underlying economic fundamentals. They have complained about “excessive volatility” and “disorderly movements in exchange rates,” which have adverse economic effects on the international financial system.
Political economists complain that the G20 has not addressed the problems head-on. In September 2010, in a report on trade and development, the UN Conference on Trade and Development (UNCTAD) noted that “the time for an intense international cooperation appears to be over.” The report added that the process launched by China, the U.S., the Euro zone, Japan and Saudi Arabia in 2006 to reduce global trade imbalances, including an adjustment of exchange rates, has been a complete failure. Moreover, adding insult to injury, none of the monetary policies that led to the emergence of these imbalances in the first place have been seriously modified. In this context, future prospects are bleak for an overhaul of the international monetary system and for achieving intensive cooperation in balancing exchange rates and equilibrating balance of payments. Instability will remain in the international monetary system for as long as a nation, internationally recognized as a key mediator, does not come forth.
To tackle current international monetary issues, a reinforcement of G20 and IMF’s powers is highly desirable. The original provisions of the IMF stipulated that its purpose, among others, was to “facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction” and to “avoid manipulating exchange rates or the international monetary system in order… to gain an unfair competitive advantage over other members.” With this in mind, then, why not restore to the IMF its original powers, mandate and legitimacy in order for the world to avoid yet another loss of control over currency exchange rates, all this under the watchful eye of the G20? Moreover, why not use the monetary reserves in central banks of the G20 members to create a international common fund – managed by the IMF – which would then seek to heavily intervene in foreign exchange markets should the value of a country’s currency severely deviate from a value deemed desirable in terms of changes in the current account of that country? That would make sense. Unfortunately, G20 members will surely decide otherwise.
Richard Rousseau, Ph.D. is a professor of international relations at the Azerbaijan Diplomatic Academy in Baku and a contributor to Global Brief, World Affairs in the 21st Century
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International Monetary Disorder
April 23, 2011
The overall lack of international cooperation in the field of foreign exchange rates is best illustrated by the Bank of Japan when between September and December 2010 it intervened to counter the appreciation of the yen. In the wake of the Tsunami and the meltdown at the Fukushima nuclear power plant, however, the Japanese currency is now continuing its steady decline against other major currencies. Yet, in the fall of 2010, the unilateral decision on the part of the Japanese Central Bank blatantly contradicted the statements of world political and international organization leaders according to which international cooperation and coordination at the highest level for maintaining the stability of major currencies was well established and working properly. Tokyo’s refusal to intervene in the currency markets to stabilize the yen would have been rather out of pace with trends as most governments are now covertly acting in the same manner to mitigate the downward or upward pressure on their currency value resulting from the world economy slowdown. At the height of the economic and financial crisis both G7 and G20 members urged the world’s leading economies to proceed to a general mobilization of forces in fighting the negative effects on the global economy. This time is now well gone. On the national level, the majority of senior politicians do not hide their bitter disappointment.
From the “benign neglect” of the dollar, despite the perennial statements by the U.S. Administration that “a strong dollar is in the interest of the United States,” to the intransigence of China, which continues to oppose any rapid appreciation of its currency, to Japan’s desire to weaken its own currency, and this contrary to all logic, and to European cacophony over what is the most appropriate value of the Euro, facts demonstrate that each country is in the business of defending its own national interests when it comes to currency management. The “ups and downs” in the value of a national currency against foreign currencies more than ever continues and the every man for himself approach dominates. All things considered, only a major risk of general destabilization of the international monetary system would bring about a new wave of general mobilization.
For the moment, many pundits say that there is no pilot in the world economy airplane; there is no economic hegemon able to steer the international monetary system. In fact, it is quite the opposite that is happening; there are many “pilots.” The issue of the relations between major currencies has been regularly raised during G7 past summits, whether at the level of finance ministers and governors of central banks or heads of state.
One only needs to revisit the Plaza Accord back in September of 1985, when the U.S., Japan, Germany, the United Kingdom and France jointly agreed to depreciate the U.S. dollar against the yen and the former Deutsche Mark. Another example is the Louvre Accord, reached two years later, when the United States, Japan, Germany, France, the United Kingdom and Canada joined forces to stop the free fall of the dollar. The last international cooperation of importance in terms of pressuring exchange rates involved the European Central Bank and U.S. Federal Reserve when they adopted monetary policies to support the fledgling euro in September 2000. These international interventions were more limited then previous one though. Since this time no concerted interventions in money markets has been implemented to correct the currency imbalances, and for good reason. The emergence of new economic giants on the horizon, on top of which stands China, complicates such monetary tasks.
G7 leaders today are in no position to manage the international monetary system for their own benefit. The economic and financial crisis has radically changed the international monetary landscape, and to such a degree that the G7 has lost its financial prerogatives in favor of an expanded club, the G20.
This can be illustrated by the September 2009 G20 Summit in Pittsburgh Pennsylvania which officially gave the upper hand to this new forum in terms of international economic issues. The G20 has been solidified as a “forum for international economic cooperation” on the level of heads of state. However, this expanded and more encompassing forum is not the most effective place to deal with issues of exchange rate, as they are addressed by world leaders only in dribs and drabs. World leaders are only able to “pay lip service” to pressing matters of currency exchange rates. Admittedly, the G20 summit in Toronto in June 2010 technically addressed the problem of currency rates volatility, albeit only in rose-tinted terms. G20 members have only pledged to allow for greater flexibility in exchange rates in order to effectively reflect the underlying economic fundamentals. They have complained about “excessive volatility” and “disorderly movements in exchange rates,” which have adverse economic effects on the international financial system.
Political economists complain that the G20 has not addressed the problems head-on. In September 2010, in a report on trade and development, the UN Conference on Trade and Development (UNCTAD) noted that “the time for an intense international cooperation appears to be over.” The report added that the process launched by China, the U.S., the Euro zone, Japan and Saudi Arabia in 2006 to reduce global trade imbalances, including an adjustment of exchange rates, has been a complete failure. Moreover, adding insult to injury, none of the monetary policies that led to the emergence of these imbalances in the first place have been seriously modified. In this context, future prospects are bleak for an overhaul of the international monetary system and for achieving intensive cooperation in balancing exchange rates and equilibrating balance of payments. Instability will remain in the international monetary system for as long as a nation, internationally recognized as a key mediator, does not come forth.
To tackle current international monetary issues, a reinforcement of G20 and IMF’s powers is highly desirable. The original provisions of the IMF stipulated that its purpose, among others, was to “facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction” and to “avoid manipulating exchange rates or the international monetary system in order… to gain an unfair competitive advantage over other members.” With this in mind, then, why not restore to the IMF its original powers, mandate and legitimacy in order for the world to avoid yet another loss of control over currency exchange rates, all this under the watchful eye of the G20? Moreover, why not use the monetary reserves in central banks of the G20 members to create a international common fund – managed by the IMF – which would then seek to heavily intervene in foreign exchange markets should the value of a country’s currency severely deviate from a value deemed desirable in terms of changes in the current account of that country? That would make sense. Unfortunately, G20 members will surely decide otherwise.
Richard Rousseau, Ph.D. is a professor of international relations at the Azerbaijan Diplomatic Academy in Baku and a contributor to Global Brief, World Affairs in the 21st Century
