"System, power, and European monetary integration"

[From the Introduction]. Theories of international relations and comparative politics characterize the movement within Western Europe toward monetary integration primarily in regional terms. The global context within which European monetary integration is taking place is viewed in this literature as having little influence or influence which is only episodic, momentary, or ancillary to other, more primary forces. Regional political integration, regional economic interdependence, sectoral interests within European countries, and strategies of national executives and central bankers are instead given primary emphasis. This article argues, by contrast, that the international system has provided strong incentives for and greatly affected European monetary integration. Changes in and unpredictability of international monetary policies of the United States, in particular, have pushed European governments toward regional monetary integration at several critical historical junctures. Indeed, all of the major successes in monetary integration were closely, and causally, associated with transatlantic monetary conflict and the decline or weakness of the international monetary regime

Coordinating Regional and Multilateral Financial Institutions

Recent crises and the expansion of international financial arrangements have dramatically elevated the importance of cooperation between regional institutions and the International Monetary Fund (IMF). While the case for coordination between regional and multilateral institutions is generally accepted, however, the need to organize it on an ex ante is not fully appreciated. The relatively successful cooperation among the European Commission, European Central Bank, and IMF on the European debt crisis is not likely to be easily replicated in joint programs for countries in other regions, moreover, and the costs of coordination failure could be very large. Recent innovations at the IMF, on the other hand, present opportunities for cooperation with regional facilities. Henning reviews (1) the case for organizing cooperation on an ex ante basis, (2) the policy and institutional matters that should be coordinated, (3) how East Asian arrangements in particular and the IMF might cooperate, and (4) an Interinstitutional Agenda of general principles, modalities, and institutional recommendations. The G-20, member states, and institutions themselves should address this agenda proactively.Financial crises, IMF, regional financial institutions, regional integration, Chiang Mai Initiative, European debt crisis, international cooperation

Congress, Treasury, and the Accountability of Exchange Rate Policy: How the 1988 Trade Act Should Be Reformed

The controversy within the United States over Chinese exchange rate policy has generated a series of legislative proposals to restrict the discretion of the Treasury Department in determining currency manipulation and to reform the department’s accountability to Congress. This paper reviews Treasury’s reports to Congress on exchange rate policy—introduced by the 1988 Trade Act—and Congress’s treatment of them. It finds that the accountability process has often not worked well in practice: The reports provide only a partial basis for effective congressional oversight. For its part, Congress held hearings on less than half of the reports and overlooked some important substantive issues. Several recommendations can improve guidance to the Treasury, standards for assessment, and congressional oversight. These include (1) refining the criteria used to determine currency manipulation and writing them into law, (2) explicitly harnessing US decisions on manipulation to the International Monetary Fund’s rules on exchange rates, (3) clarifying the general objectives of US exchange rate policy, (4) reaffirming the mandate to seek international macroeconomic and currency cooperation, (5) requiring Treasury to lead an executivewide policy review, and (6) institutionalizing multicommittee oversight of exchange rate policy by Congress. Legislators should strengthen reporting and oversight of broader exchange rate policy in addition to strengthening the provisions targeting manipulation.Exchange rate policy, currency manipulation, accountability, congressional oversight, China,Treasury, International Monetary Fund

US Interests and the International Monetary Fund

The US Congress is now considering legislation to approve President Obama's pledge, made at the G-20 London summit in April, to increase the US commitment to the International Monetary Fund (IMF). This pledge is part of a collective effort by the G-20 leaders to triple the resources available to the IMF so that it can better respond to the ongoing global economic crisis. To this end, President Obama has submitted a four-part package to Congress for approval. The package would increase the US quota contribution to the IMF by about $8 billion, raise an emergency line of credit for the Fund by nearly$100 billion, endorse the IMF's plan to endow an investment fund through sales of some of its gold reserves in order to provide for its operational expenses, and approve a special allocation of the IMF's synthetic reserve asset, Special Drawing Rights (SDRs). C. Randall Henning analyzes the politics and policy merits of the IMF legislation before Congress through a discussion of the IMF's role in the international monetary system, its relationship to US interests, and the congressional record of past IMF legislation. He argues that the present financial troubles have only increased the need for strong US support of the Fund. The IMF reflects the economic policy interests of the United States more faithfully than perhaps any other international institution and congressional action should reflect this basic convergence of interest. Failure to support the IMF now would not only hamper global and US recovery from the current crisis, but it would also undermine US influence, both within the IMF and in international relations generally.

The Future of the Chiang Mai Initiative: An Asian Monetary Fund?

Senior officials of East Asian governments and central banks will hold several meetings between February and May 2009 to consider, among other things, transforming the Chiang Mai Initiative (CMI) from a network of bilateral swap arrangements into a collectively managed fund--which they refer to as "CMI multilateralisation." The region's disaffection from the International Monetary Fund (IMF), stemming from the 1997-98 financial crisis, sustains the attraction of such a fund among the ten members of the Association of Southeast Asian Nations plus China, Japan, and South Korea (ASEAN+3). The present financial crisis presents a moment of truth for ASEAN+3: Are they serious about regional financial cooperation? Creating a common regional fund would require addressing questions of obligations, contributions, and rights of members as well as the size, governance, and borrowing arrangements. ASEAN+3 officials appear to be converging on $120 billion as the size of the fund. But they have yet to decide on the specific contributions from each member and exactly how joint decisions will be made. The shares of China and Japan are particularly important, because they will determine the relative influence of the two countries. Henning argues that CMI multilateralisation could contribute to the global financial architecture by supplementing the resources of the IMF and streamlining negotiations over financial rescues. ASEAN+3 should develop their own surveillance mechanism further with assistance of international financial institutions. Given the current weakness of regional surveillance, however, East Asian governments should continue to link their bilateral swaps and any common fund to the IMF. Henning urges the international community to establish guidelines for the respective roles of regional facilities, the IMF and other international financial institutions.

Economic Crises and Institutions for Regional Economic Cooperation

This paper examines the extent to which economic crises facilitate the development of more effective regional institutions and whether such institutions can shield regions from crises. It compares six regional economic crises over the last four decades and the institution building—or decay—that followed. The analysis concludes that five conditions are especially important in generating a constructive regional response: (i) a significant degree of regional economic interdependence; (ii) an independent secretariat or intergovernmental body charged with cooperation; (iii) webs of interlocking economic agreements; and, as elements of the multilateral context, (iv) conflict with the relevant international organization (such as the International Monetary Fund [IMF]); and (v) the support of the United States. The paper then reviews three episodes of crises in Europe, concluding that the Economic and Monetary Union (EMU) has deflected balance of payments and currency crises but not crises of other types, such as sovereign debt crises. Asian regionalism would be well served by heads of government taking the lead and delegating tasks to intergovernmental networks and secretariats, central banks and finance ministries retaining substantial collective autonomy in their fields of responsibility, and the use of concentric circles to accommodate countries with different levels of commitment to regionalism.Economic crises; financial crises; regional institutions; Asian regionalism; regional integration

Fiscal federalism: US history for architects of Europe's fiscal union

Ever since first the blueprints for monetary union in Europe were drawn up, the United States, considered as a collection of individual states or regions, has served as a benchmark for assessing its feasibility and evaluating alternative policy options. Starting with Robert Mundellâ??s seminal 1961 article on optimal currency areas, countless papers have explored the inner workings of US labour, product and capital markets, and of its public finances, in the hope of learning lessons for Europe. It could be argued that this US inspiration is mistaken. After all, it is not the only economic and monetary federation in the world. Other federations work on different principles â?? especially when it comes to public finances â?? and there is no guarantee that US arrangements are optimal â?? especially, again, regarding public finances. But we know the US better and we think we understand it better, so success or failure relative to the US test carries much more weight than with the Australian, Canadian, Indian or Swiss tests. For better or worse, the US remains our ultimate policy laboratory. This essay on US fiscal federalism by Randall Henning and Martin Kessler builds on the established tradition. But unlike many papers that take current US features as a given, they tell us what present arrangements governing responsibility over public debt gradually emerged from, and why. By bringing in the historical dimension and the trial-and-error process that took place over more than two centuries, they help us understand the logic behind alternative arrangements and why the current one has in the end prevailed. Their careful historical account yields several important lessons. It first recalls that the US system as we know it, with its combination of a large federal budget responsible for the bulk of public debt and limited thrifty state budgets subject to balanced budget rules, emerged gradually from a sequence of events; in fact the initial set-up, as designed and enforced by Alexander Hamilton, was almost exactly the opposite. Second, it makes clear that beyond economic principles, attitudes towards what was in the aftermath of independence called the â??assumptionâ?? of state debt were shaped by broader political considerations â?? not least the aim of building a genuine federal government. Third, it explains how after the US was firmly established as a federation, changing political conditions led to a reversal of the federal governmentâ??s stance and to the enforcement of a â??no bail-outâ?? principle. An intriguing feature of US history is therefore that the competences and features of federal government grew out of its assumption of state debt, and that the centre imposed a de-facto no bail-out regime only after having assumed essential powers. Another interesting observation by Henning and Kessler is that balanced budget rules were adopted spontaneously by states in response to financial stress and defaults, rather than as a disciplinary device mandated by the centre. Thus, there is still significant variability between states regarding the modus operandi and strictness of budget rules. The question remains if what matters is the strictness of the rule, or deeper political preferences at state level, of which the rule is only an expression. Finally, Henning and Kessler emphasise, a no less important lesson for Europe is that policy principles and institutions should be looked at as a system rather than in isolation. As the authors point out, it may seem obvious to recall that states in the US can abide by strict budget balance rules to the extent the federal government is responsible for stabilisation and the bail-out of insolvent banks, but this simple lesson is sometimes overlooked in European discussion. Jean Pisani-Ferry Director of Bruegel

Asia and Global Financial Governance

Currently, Asia’s influence in global financial governance is not consistent with its weight in the world economy. This paper examines the role of Asia in the International Monetary Fund (IMF) and the Group of Twenty (G-20). It looks in particular at how the relationship between East Asian countries and the IMF has evolved since the Asian financial crisis of 1997-98 and outlines how Asian regional arrangements for crisis financing and economic surveillance could constructively interact with the IMF in the future. It also considers ways to enhance the effectiveness of Asian countries in the G-20 process.Asia, G-20, IMF, regional financial arrangements, global governance