BIS - Lorenzo Bini Smaghi: The world after the crisis – designing the future. A monetary order for the XXI century

Lorenzo Bini Smaghi: The world after the crisis – designing the future. A monetary order for the XXI century

 Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at the Aspen Institute Italia, World Economy Conference, Villa Madama, Rome, 23 June 2009.


"I would like first of all to thank the organisers for inviting me to participate in this panel discussion on a new Monetary Order for the XXI Century.1 The title seems to suggest that we had a monetary order in the previous century, but then we lost it in the course of this decade and we now need something new. In fact, we have been searching for a new monetary order since the fall of the Bretton Woods agreement, in the summer of 1971, and even that order was not so orderly, after all..."

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We entered this century with a new consensus, in which policy-makers took a back seat and relied heavily on markets to allocate capital across countries, while the IMF was mandated to exert a strong surveillance role with a view to ensuring transparency and encouraging early adjustment. This was the consensus reached at the G7 Summit in Cologne, in 1999, which was later adopted by the G20.

The expectations have not been fully met, for several reasons. First, several emerging market economies have not let their currencies float freely, and have continued to peg their exchange rates, although at undervalued rates (instead of overvalued). The reason has not only been a fear of floating but also a desire to promote exports as well as to accumulate reserves as a self-insurance policy in case of a crisis. In turn, the accumulation of large surpluses, especially in emerging Asia and in oil-exporting countries, has made possible the financing of the US current account deficit. It has also influenced monetary conditions in the US, lowering long term interest rates and making monetary conditions more expansionary than would otherwise have been the case.

The second reason is that the IMF has not succeeded in convincing countries to pursue macroeconomic policies consistent with sustainable current account positions. Advanced economies, in particular the US, have not taken IMF advice fully into consideration in their decision-making. Emerging economies, partly following the example given by the advanced countries, have also attached less importance to IMF surveillance. The accumulation of external assets has made them less dependent on IMF funding and advice. For example, the IMF has not succeeded in completing an Art. IV surveillance programme with China since 2006. Furthermore, the IMF has been reproached by emerging market economies of lacking legitimacy, in view of their relatively low quota and representation..."

Source: http://www.bis.org/review/r090626e.pdf?frames=0