[Viewpoint] A new global monetary orderThe international monetary system - sets of internationally agreed rules and conventions for trade, capital exchange and cross border investment among nations - may sound like Greek to many. But they are in fact closely interwoven with our daily lives. If it is in turmoil, it affects export competitiveness, jobs, equity markets, interest rates, oil prices and overseas travel expenses.
The global system is now being studied like a architect’s plan for a redesign. France - this year’s chair country for G-20 meetings - has proposed key reforms in the international monetary system as the main agenda for the November summit conference. The preliminary meeting of G-20 finance ministers in Washington last weekend debated the issue.
International monetary systems have evolved over the last millennium to accommodate changes in market conditions. In early days of trade, gold, silver and other precious metals served as the de facto monetary base as they contained acknowledged monetary value across borders. The global monetary system was loosely based on the gold standard until the First World War.
But during the Second World War, countries saw the need to come up with cash to finance the war expenses without being constrained by their gold reserves and began printing fiat money - legal national currency. The global financial order, however, plunged into turmoil as countries competitively weakened their currencies and protected their markets to gain trade profits, which caused inflation and hurt global trade as a result. U.S. and British leaders led the post-war monetary order at Bretton Woods based on a renewed gold standard.
The 1944 meeting of 42 countries agreed on a system of fixed but adjustable exchange rates where currencies would be pegged to the U.S. dollar with the dollar itself convertible into gold. But the system last only three decades when U.S. President Richard Nixon declared an end to gold convertibility in 1971, sending countries to switch to floating exchange rates with their reserve currencies. But the International Monetary Fund and the World Bank - created by the Bretton Woods accord to serve as reliable international lenders - and the U.S. dollar remain the primary monetary standard bearers in the global economic system.
Many have called for a new international financial architecture because of the flaws and imbalances in the current monetary system that results in vicious cycles. Emerging economies, after suffering financial crises, compete to pile up current account surpluses and foreign exchange reserves, exacerbating the imbalance in the global economy.
The dollar is mostly in demand as the world’s reserve currency. Despite its fiscal and deficit mess, the U.S. can run monetary and fiscal policy in a reckless manner because its reserve status as the world’s de facto global currency protects it from financial crises and permits the issuance of cheap debt on the international market.
Moreover, the dollar’s hegemony translates into an overreliance on a single nation’s economic and financial situation. A collapse of the U.S. economy can jeopardize the entire global economy. But the U.S. failed to restore global confidence in its ability to maintain leadership in the wake of the 2008 financial crisis. Standard & Poor’s unprecedented downgrade in the outlook for the U.S. sovereign debt rating from stable to negative underscores the skepticism in U.S. economic leadership.
Yet the problem is that there is no plausible replacement for the dollar. With Europe still battling with a sovereign credit crisis, the euro can hardly pose as a reliable base currency. China’s yuan cannot win trust from international players due to the country’s strict capital controls. To create a new standard currency, a new global central bank is needed.
But the eurozone’s complicated trajectory showed how difficult and even impossible it is to unify currencies without integration of fiscal, social and political systems. The current debate on establishing a new monetary order has developed into a war of tension among the U.S., Europe and China.
So far, the G-20 platform to synchronize fiscal and monetary actions to ease imbalances in the global economy and a stronger IMF role remain the best possible solutions.
Korea remains central in the G-20 executive board after it successfully chaired last year’s summit. A stable monetary system is crucial for a country that relies heavily on external trade. It is also important that our main security ally, the U.S., sustains a leading monetary role. We should raise our voice to campaign for a gradual reform of the international monetary system.
*The writer is a professor of Sogang University School of International Studies.
By Cho Yoon-jae