Back in March, Zhou Xiochuan, head of China’s central bank, created quite a stir when he suggested the need for an international currency to replace the dollar. Now, the United Nations has followed suit.
Edmund Conway, economics editor for The Telegraph:
In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises. It added that the present system, under which the dollar acts as the world’s reserve currency, should be subject to a wholesale reconsideration.
Although a number of countries, including China and Russia, have suggested replacing the dollar as the world’s reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion.
In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
Bloomberg‘s Jonathan Tirone adds:
The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said. UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.” While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.
Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.
“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”
While I continue to believe we’re a long way from achieving consensus on such a move — the dollar is a known commodity whereas the world currency is not — the fact that major players are even openly discussing the possibility is intriguing. Still, one wonders whether the UN or the IMF have sufficient reputations for competence to be trusted with managing something so vital better than admittedly imperfect markets.
UPDATE: Via Twitter, Steve Schippert correctly notes that we should distinguish between UNCTAD and the UN itself. Indeed, UNCTAD is the body that was the principal advocate in the 1970s and 1980s for the New International Economic Order, a developing world-driven redistribution proposal that went nowhere.
James Joyner is managing editor of the Atlantic Council.