The world needs a co-ordinated framework for capital controls in which the IMF can act as a global referee, says Christine Lagarde, the French finance minister.
France wants IMF to be referee
PARIS // The world needs a co-ordinated framework for capital controls in which the IMF can act as a global referee, says Christine Lagarde, the French finance minister.
Leaders of the Group of 20 (G20) leading and emerging economies should also explore the possibility of giving a more important role to Special Drawing Rights (SDR) as they try to find ways to reform the international monetary system, Mrs Lagardesaid yesterday at a conference organised by the Reinventing Bretton Woods think tank. SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves
Even as she warned capital controls should be used only in extraordinary circumstances, Mrs Lagarde said they should be co-ordinated and suggested the role of co-ordinator could be given to the IMF.
"Controlling capital flows is not necessarily a good solution, as capital will go to other places … It should only be done sporadically, in case of a surge in capital flows, and in a co-ordinated fashion. There needs to be a referee", which could be the IMF, she said.
France took over the presidency of the G20 last month and has vowed to explore ways to overhaul the international monetary system to make it less reliant on the US dollar and to reduce currency volatility that it says is undermining global growth.
Several emerging countries, including Brazil, have imposed levies on capital flows going through their borders in a bid to limit the appreciation of their currencies. Because of interest rates close to zero in developed economies, emerging nations have recently faced rising capital inflows in search of higher yields.
They have also blamed bond purchasing measures announced by the US Federal Reserve, which have pushed rates down in the US, for accelerating capital inflows directed at them.
Mrs Lagarde also said a world with a single reserve currency would be vulnerable to economic crises, underlining the need for more global policy co-ordination in the face of trade imbalances.
"The fact that there is only one reserve asset but several economic areas is a source of vulnerability," she said. "It leaves us exposed to financial turmoil in the event of fast depreciation."
The dollar's role as the linchpin of the global monetary system has come under attack from some policymakers since the 2008 financial crisis. Zhou Xiaochuan, the governor of the People's Bank of China, has proposed that the IMF take over leadership of the global monetary system from the US.
Dmitry Medvedev, the Russian president, has also questioned the role of the dollar and his government aims to diversify its reserves, the world's third-largest, and promote the use of regional currencies in international trade and finance to reduce risks posed by the dominance of the dollar. Mrs Lagarde's remarks reflect French thinking at a time when Nicolas Sarkozy, the president, holds the chairmanship of the G20 economies that are trying to set global economic policy in the wake of the financial crisis.
France is aiming to foster discussion about the monetary system rather than impose a specific vision, Mrs Lagarde said.
"France does not have the ambition to provide ready-made solutions," she said. "We don't have a magic wand, we don't have a philosopher's stone. You are going to participate in that decision," she told the audience of central bankers, economists, academics and government officials from around the world.
Reducing trade imbalances that are blamed in part for the 2008 financial crisis, together with setting out a new framework for a global monetary system, are among the top priorities of the G20. The existence of one reserve currency would not be a problem if that currency remained stable, Mrs Lagarde said. In recent years, however, increasingly volatile foreign exchange markets have undermined global economic growth and proved a growing challenge for companies trying to trade beyond their own borders.
The minister also repeated France's view that one possible way to address trade imbalances would be to offer a financial safety net to developing countries.
The volatility of exchange rates and capital flows has disproportionately threatened emerging market economies, Mrs Lagarde said, prompting them to accumulate huge reserves, distorting trade patterns and the global economy.
* with agencies