Jean-Pierre Landau: International monetary arrangements Speech by Mr Jean-Pierre Landau, Second Deputy Governor of the Bank of France, before the Reinventing Bretton Woods Committee, Beijing, 6 September 2010. *  *  *  Opinions expressed are solely mine and do not represent the views of Banque de France or the Eurosystem. International financial and monetary arrangements are currently extensively debated. For many countries, both advanced and emerging, the crisis has shown that there is a close link between internal and international financial stability. In addition, rebalancing of the world economy stands at the forefront of the G20 policy agenda and there is a perception it may be difficult to achieve under current arrangements. According to an apt definition, an international monetary system consists of (i) exchange rate arrangements; (ii) capital flows; and (iii) a collection of institutions, rules, and conventions that govern its operation (Carney, 2009). Explicit or implicit “rules of the games” form the backbone of such a system. This is an ambitious approach and it may seem too normative to some. But it has a long history, starting with the gold standard, from which the phrase “rules of the games” originated. The Bretton Woods system itself was built around an elaborate framework of rules, disciplines and support mechanisms aimed at ensuring convertibility for the current account – but, crucially, not the capital account –, together with fixed but adjustable exchange rates. With the generalisation of flexible exchange rate regimes, the normative approach to the international monetary system was somehow weakened.

Opening the capital account exposes countries to increased financial volatility. The impact, however, is different for capital importers and exporters. Capital importers face the possibility that flows would abruptly dry up, thus inflicting damaging shocks to their financial systems and national economies. Capital exporters accumulate claims on the outside world and, therefore, run the risk of valuation losses (through exposure to country and exchange rate risk). Ideally, an international open capital account regime would protect both capital importers towards sudden liquidity shocks and capital exporters toward abrupt changes in the value of their assets. These are potential avenues for progress and debate. International liquidity The crisis is a powerful reminder that liquidity – both domestic and international – can never be taken for granted. The provision of international liquidity has been severely disrupted. How will it be provided in the future, and by whom? These are not new questions. In the recent period, Governor Zhu, from the People Bank of China has raised the issue of reserve currencies. According to Governor Zhu, current arrangements for liquidity provision are a source of instability and have played a role in causing the crisis. Governor Zhu has mentioned, in particular, the intrinsic contradiction embodied in the famous “Triffin dilemma”. Because the dollar is the major reserve currency, international liquidity supply depends on the US running a sufficiently large current account deficit which, by itself, aggravates global imbalances and creates instability.