jurgen stark : the future of the international monetary system – lessons from 1971 for europe and the world in light of past and present experience speech by mr jurgen stark, member of the executive board of the european central bank, for the golden series on world money, organised by the official monetary and financial institutions forum, london, 11 may 2011. * * * ladies and gentlemen, it is a pleasure to talk in front of this distinguished audience about the future of the international monetary system and i would like to thank omfif for inviting me to its golden series on world money. as you know, this lecture series takes place against the background of the fortieth anniversary of the closing of the gold window, also dubbed the “ nixon shock ”, which marked the end of the bretton woods system. let me however also recall another anniversary which is less well known. it was today, on the 11th of may, of 1998 that the first euro coins were minted. this, in some way, marked the beginning of the euro as “ real ” money that would circulate among by now 330 million european citizens. and no doubt, the single currency is and will in the future remain a guarantee of stability and prosperity in europe. but before i turn to the future of the international monetary system, let me look back in history and briefly sketch the evolution – and trace out some constant elements – of the international monetary system since the gold standard. * * * let me anticipate my conclusions already now : the history of the international monetary system is marked by repeated – and often failed – attempts to establish fixed exchange rate regimes, in one way or another. the reason is that the underlying belief that freely floating exchange rates are unambiguously an obstacle to international trade and domestic macroeconomic stability is based on a fundamental confusion. it is true that, in europe, we are witnessing that economies at a similar stage of development, with a high degree of real and financial integration and largely synchronised business cycles greatly benefit from a common currency under a common monetary policy and in a common market. at the global level, however, where the degree of convergence, integration and synchronisation is far less pronounced, countries at very different stages of development and with very different growth models stand to benefit instead from the corrective mechanism that fluctuating exchange rates constitute. fixing exchange rates at the global level, to the contrary, has rarely benefited the global economy. in fact, domestic policy objectives have too

. the system only moved into disequilibrium as a result of the growing economic weight of emerging economies that have kept their exchange rates at artificially low levels via massive accumulation of reserves. at the same time, expansionary economic policies in some advanced economies, on account of the massive capital inflows from emerging economies, were the flip - side to the build - up of imbalances. the window of opportunity to change the relevant policy frameworks is closing quickly as global growth is resuming and the cyclical determinants that led to the temporary unwinding of imbalances disappear. in addition, with the two - speed recovery and different cyclical positions, political interests have started to diverge again between the major currency blocs. the corrective mechanism hence needs to be restored. greater flexibility in the exchange rates of major emerging economies is in this respect a fundamental precondition for a stable international monetary system. at the same time, macroeconomic policies should avoid the externalisation of domestic imbalances to the global economy. hence, the restoration of a stable international monetary system based on flexible exchange rates requires a fundamental change in economic mind - set across the global economy, rather sooner than later. let me thus close citing from the foreword of john maynard keynes ’ tract on monetary reform which represents a fervent argument for targeting domestic stability even at the cost of fluctuating exchange rates : “ nowhere do conservative notions consider themselves more in place than in currency ; yet nowhere is the need of innovation more urgent. ” against these lines, written in 1923, my remarks today may not have been overly innovative, but i would say innovative enough for an alleged conservative. on that note, i sincerely thank you for your attention! bis central bankers ’ speeches