The next few months see a new president at the European Central Bank and a key G20 summit, both capable of seriously influencing the shape of a new global monetary order. What is needed most are wise and consistent decisions by the politicians.
It is time for them to produce a New Deal on ‘green growth’ for sustainable world development, guided by the principle of common but differentiated responsibilities. This needs to be backed by a new Bretton Woods system reflecting today’s realities, involving OECD as well as BRICS countries.
Unfortunately, the past few months will be remembered for monetary calamities in the US and Europe. The next G20 meeting is on 3-4 November in Cannes, where international monetary reform is high on the agenda. The Financial Stability Board (FSB) recently published an overview of relevant reports for this meeting. But the monetary events of the past two months threaten to overwhelm the change the G20 is supposed to achieve in Cannes.
In July, euro area governments decided a second bail-out package for Greece, including a considerable expansion of the means and mandate of the EFSF rescue fund. Yet it soon became clear that the package was inadequate to stop massive speculation against weaker euro countries.
In August, we saw lack of fundamental agreement among US politicians on reducing the budget deficit, the US debt downgrading, and the sharp rise in ECB purchases of Italian and Spanish bonds. On 15 August Chancellor Angela Merkel and President Nicolas Sarkozy agreed to set up a 'European Economic Government', to be headed by Herman Van Rompuy, European Council president. This is as a step in the right direction, yet it will not by itself resolve the euro crisis.
Instead, in the US as well as in Europe, much more consistent political action is necessary. The US needs a political breakthrough not just on budget cuts, but also on raising taxes. Yet the Tea Party's influence appears to block any reasonable way forward.
In Europe, financial discipline needs to be soundly enforced, backed up by political agreement to allow the ECB to issue euro area-wide bonds, under the condition that the bank simultaneously gets the power to impose stringent austerity measures. An ECB 'with teeth' is the only way effectively to implement austerity measures in weaker euro countries that reduce the costs for stronger ones.
ECB president Jean-Claude Trichet has stretched the bank's mandate to the utmost. But Trichet does not have the formal power to create or issue euro bonds; that would need to be handed to the bank by the euro countries - on strict financial conditions.
On 1 November Mario Draghi, governor of the Bank of Italy, will take over at the ECB. This is as an historic opportunity to give the ECB new powers to enforce financial discipline and issue euro bonds. In our view, Draghi should decline his new job unless the politicians give him these new powers.
The G20 summit in November equally requires political action. The time of the dollar's monopoly is over. Euro bonds would enhance the euro's reserve currency position, but not make it the replacement for the dollar. As the emerging economies' rise continues, their currencies - especially the renminbi - will steadily grow in strength, but there will not be another reserve currency that displays the same 'exorbitant privilege' as the dollar.
Many people such as US economist Barry Eichengreen envision a new order based on the dollar, the euro and the renminbi. But it would be more sensible first to decide a new governance system for the International Monetary Fund, allowing more influence for the emerging economies - especially the BRICS countries. This reform should be the highest priority in Cannes.
Once there is consensus about reconstituting the IMF, one can start to think about expanding the IMF's currency basket, the Special Drawing Right, enabling it to become over time the prime global reserve currency. In short, the G20 summit in Cannes should be about monetary stability and a new monetary order. Both elements are crucially necessary to restore confidence.
Source: www.thezimbabwean.co.uk
It is time for them to produce a New Deal on ‘green growth’ for sustainable world development, guided by the principle of common but differentiated responsibilities. This needs to be backed by a new Bretton Woods system reflecting today’s realities, involving OECD as well as BRICS countries.
Unfortunately, the past few months will be remembered for monetary calamities in the US and Europe. The next G20 meeting is on 3-4 November in Cannes, where international monetary reform is high on the agenda. The Financial Stability Board (FSB) recently published an overview of relevant reports for this meeting. But the monetary events of the past two months threaten to overwhelm the change the G20 is supposed to achieve in Cannes.
In July, euro area governments decided a second bail-out package for Greece, including a considerable expansion of the means and mandate of the EFSF rescue fund. Yet it soon became clear that the package was inadequate to stop massive speculation against weaker euro countries.
In August, we saw lack of fundamental agreement among US politicians on reducing the budget deficit, the US debt downgrading, and the sharp rise in ECB purchases of Italian and Spanish bonds. On 15 August Chancellor Angela Merkel and President Nicolas Sarkozy agreed to set up a 'European Economic Government', to be headed by Herman Van Rompuy, European Council president. This is as a step in the right direction, yet it will not by itself resolve the euro crisis.
Instead, in the US as well as in Europe, much more consistent political action is necessary. The US needs a political breakthrough not just on budget cuts, but also on raising taxes. Yet the Tea Party's influence appears to block any reasonable way forward.
In Europe, financial discipline needs to be soundly enforced, backed up by political agreement to allow the ECB to issue euro area-wide bonds, under the condition that the bank simultaneously gets the power to impose stringent austerity measures. An ECB 'with teeth' is the only way effectively to implement austerity measures in weaker euro countries that reduce the costs for stronger ones.
ECB president Jean-Claude Trichet has stretched the bank's mandate to the utmost. But Trichet does not have the formal power to create or issue euro bonds; that would need to be handed to the bank by the euro countries - on strict financial conditions.
On 1 November Mario Draghi, governor of the Bank of Italy, will take over at the ECB. This is as an historic opportunity to give the ECB new powers to enforce financial discipline and issue euro bonds. In our view, Draghi should decline his new job unless the politicians give him these new powers.
The G20 summit in November equally requires political action. The time of the dollar's monopoly is over. Euro bonds would enhance the euro's reserve currency position, but not make it the replacement for the dollar. As the emerging economies' rise continues, their currencies - especially the renminbi - will steadily grow in strength, but there will not be another reserve currency that displays the same 'exorbitant privilege' as the dollar.
Many people such as US economist Barry Eichengreen envision a new order based on the dollar, the euro and the renminbi. But it would be more sensible first to decide a new governance system for the International Monetary Fund, allowing more influence for the emerging economies - especially the BRICS countries. This reform should be the highest priority in Cannes.
Once there is consensus about reconstituting the IMF, one can start to think about expanding the IMF's currency basket, the Special Drawing Right, enabling it to become over time the prime global reserve currency. In short, the G20 summit in Cannes should be about monetary stability and a new monetary order. Both elements are crucially necessary to restore confidence.
Source: www.thezimbabwean.co.uk
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