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.

Bad Economics and Bad Politics in the Eurozone

When Lehman Brothers collapsed, no one knew which bank would be next. Counterparties lost faith in all measures of the soundness of banks. Under such a scenario, the only course of action that made sense was to hold one’s money close to the chest. This individually rational response was collectively disastrous. The uncertainty around the size and distribution of potential losses led to systemic collapse.

Something similar has been unfolding in the Eurozone bank/sovereign crisis albeit in slow motion. The failure to draw a line under the crisis has meant that the continuing uncertainty around the size and distribution of losses in the Eurozone is haemorrhaging our economy. The size of this deadweight economic loss, with all its human cost, is increasing with every additional day of inaction. Political dithering and mixed messages have ensured that no one knows how, when or where these losses will materialize.

Quick Comments on the Review of the Mifid Directive

On request from the commission we have sent in our detailed comments to the Mifid review consultation on which we have been in close touch with DG Markt. Here is our quick accessible take on some of the more controversial issues where media interest has been high.

General

EU Crisis Management Paper for the European Parliament

A growing consensus of analysts and informed commentators have criticized both the EU’s handling of the growing sovereign crisis in the Euro area as well as its proposed plans for future reform supposedly designed to prevent a recurrence of this crisis. There is an urgent need to change course.

Our latest paper (download here) offers several new suggestions on how best to 1) institutionalize a successful and credible crisis management response in the EU in the short and long term 2) improve the existing European Financial Stability Facility 3) construct a permanent European Stabilization Mechanism.

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