The future of the Euro and the IMS

SupaNova

Vice-President of the European Central Bank Speech:

Vítor Constâncio: The future of the international monetary system

Cliffs: The changing IMS, the Euro to play a large role, China and others to have more of a say. The problem of imbalances and lack of adjustment mechanism in the current IMS.

"Towards an unavoidable, but desirable, multi-polar IMS?"

"There are many predictions about the gradual addition of other currencies to the dollar as truly international currencies. What seems to make this unavoidable it is not only the emergence of the euro, the increasing strength of China or the growing vulnerabilities of the US. The growth in importance of emerging countries, that have seen their share in the world GDP augmented by 15 percentage points in the last 20 years, creates a structural increase for the demand of reserves that the developed countries, including the USA, will not be in a position to supply. This question is linked with the problem of the provision of official international liquidity."

"The euro has established itself as the second most important international currency after the US dollar. At the same time, this role is predominantly regional in nature, since the euro is mainly used by economic agents resident in euro area neighbouring countries with special political and economic ties to the European Union and the euro area. More recently, it is known that Asian investors and foreign central banks accounted for a sizable share of the demand for bonds issued by the European Financial Stability Facility (EFSF)."

"Looking ahead, the share of the euro in international markets has the potential to rise further once financial stability and market integration is restored in the euro area. The ongoing efforts to improve the governance of the euro area and provide it with a credible crisis resolution mechanism will also indirectly affect the international use of the euro, even if the ECB and the Eurosystem do not take any initiatives to directly promote its use (Angeloni, Sapir 2011). This neutral stance – neither foster nor hinder – is based on our conviction that the international use of currencies should be a by-product of autonomous market decisions"

"I share Kregel’s (2010) view that “the basic problem [with the current IMS] is not the particular national liability that serves as the international currency, but the failure of an efficient adjustment mechanism for global imbalances”."

"The fact that these imbalances have persisted for so long exposes a key weakness of the system, namely the inadequacy of the adjustment mechanisms."

Speech by Member of the executive board:

José Manuel González-Páramo: The sovereign debt crisis and the future
of European integration

Cliffs: ECB defends its relatively tight stance

"First in a monetary union fiscal and supervisory authorities have to adopt policies that counteract the emergence of private financial imbalances at the national level. This is a consequence of the ECB’s legal obligation to maintain price stability in the euro area – defined as an inflation rate of below, but close to, 2% over the medium term. Private debts denominated in euros cannot be ‘inflated away’.

Second, fiscal and other national macroeconomic policies have to ensure competitiveness by resisting increases in nominal trends. This is the implication of sharing an exchange rate; devaluation cannot be used as a tool for any one country to regain competitiveness. Benchmarking against other euro area countries is unavoidable.

Third, fiscal authorities have to build up sufficient buffers in good times to withstand adverse conditions. This follows from the prohibition on monetary financing which prevents the central bank from directly financing governments as well as the so-called ‘no bail out clause’ of the Treaty which prohibits a Member State to assume the liabilities of another Member State. The failure to build adequate fiscal buffers during times

[...]
The ECB has been widely recognised as an institution capable of timely, decisive and convincing action during tumultuous times. We see this as a mark of distinction. However, it would be erroneous to derive from this that it should be a political institution in charge of running the euro area economy. It cannot be and should not be. The ECB is a central bank, committed to its mandate to preserve price stability over the medium term. It is not the fiscal lender of last resort to sovereigns. Markets participants that call for the ECB to play this role may care only about the nominal value of their assets and the need to avoid losses. Whether or not the underlying asset – our currency as store of value – has been depreciated seems unimportant to them. But survey after survey shows that the people, the citizens of the euro area, want price stability. They care deeply about their purchasing power and the value of their savings. The ECB has been established with a clear mandate to meet these expectations.

Moreover, what these calls for more activism overlook is the positive effects of the ECB’s stance over the medium term. There are some in the academic world that argue that one way out of the sovereign crisis would be for the central bank to act as a lender of last resort to the sovereign. These voices suggest that euro area countries are more vulnerable to liquidity stresses relative to the situation in economies where the central bank is supposedly prepared to backstop the government bond market.

Certainly the ECB, as the central bank of all EMU countries jointly, cannot act as the central bank of specific countries. But is this in fact a disadvantage for Europe? In a sense, euro area countries have given up sovereignty over their national currency. This implies that maintaining their public debts at reasonable levels requires commensurately more convincing fiscal and economic policies. It also requires that they “tie their hands” in a credible manner through stronger and more automatic economic governance. The monetary financing prohibition, in this way, is a spur towards better policies and better governance – in other words, a closer economic union."

"Towards an unavoidable, but desirable, multi-polar IMS?"

I personally see the ongoing changes as unavoidable but desirable.

Amidst all the this hype i don't really see the Euro going anywhere and i do like the ECB's disciplined stance. In stark contrast is the FED and their loose policy and the lack of pressure to address fiscal imbalances. In the first speech linked, their is a lot of implications for the US dollar and its privilege as reserve currency. Mentioning an increased role for China and emerging economies, and the continued importance of the Euro means a decreasing role for the US.