Imbalances

Eurocrisis Conversation with Barry Eichengreen

Sony:  Nice to see you Barry, let’s jump straight into it. What would you say is the state of play in the Eurocrisis?

Barry:  European officials and leaders were telling us at the beginning of the year that the crisis was over. I doubt that most people believed them, although the markets were surprisingly sanguine for a time. None of the underlying problems had or have been solved; even before the fiasco surrounding Cyprus it was clear that the crisis would to be back.  There had been no real re-balancing within Europe, no progress on banking union, and no agreement on limited fiscal union. So, I do not think anything has been solved, which renders me more pessimistic with the passage of time. 

My view has always been that there would be no Eurozone collapse.  At the same time I see no signs of a miraculous resumption of growth.  Ruling out these alternatives leaves only the option of a lost decade in Europe, as the member states stumble towards deeper integration. But increasingly I worry that the political system cannot support a lost decade. 

Prospects for Reform of the Global Monetary System

The discussion on reform of the global monetary system is a central theme of the French G-20. A renewed growth of global imbalances, an increasing volatility of exchange rates, a proliferation of unilateral measures by countries to manage capital flows and exchange rates – part of the so called “currency wars”, and the continuing inefficient accumulation of foreign exchange reserves by many countries has set the context for this discussion. This Policy Brief for the European Parliament pins down the main elements of what a monetary system is, gives a brief history of what systems the world has seen in the recent past and then highlights the main problems faced by the current system.

Next we look at the various options for reform that are being considered for each of the main aspects of the monetary system namely 1) the anchor currency 2) the exchange rate system 3) the institutional structure and 4) rules of the game.

We conclude that any radical shift in the current regime does not seem to be politically feasible and that the case for the EU pushing for the Euro to become an anchor currency has not been made. There are a number of elements such as a more prominent role for SDRs, an improvement of the IMF and an agreement on principles for capital account and exchange management that are clearly both feasible and desirable.