Finance chiefs and central bankers from the Group of 20 will take a break this week from their efforts to rejuvenate the anemic global recovery, and instead contemplate another challenge: how to retool the world’s financial plumbing to prepare for the next crisis.
People’s Bank of China Governor Zhou Xiaochuan, German Finance Minister Wolfgang Schaeuble and U.K. Chancellor of the Exchequer George Osborne will be among the policy makers meeting Thursday in Paris to discuss the world’s financial architecture. They will be joined by IMF Managing Director Christine Lagarde, OECD Secretary-General Angel Gurria, and economists including the London Business School’s Helene Rey.
The event gives Zhou an opportunity to build on his argument that the global monetary system is too reliant on national reserve currencies such as the dollar, an idea he has been pushing since the 2008 global financial crisis. This week’s meeting is being billed as “Nanjing II,” a sequel to a similar conference in the Chinese city on the same date in 2011, where Lagarde and then-French President Nicolas Sarkozy held out the possibility of adding the yuan to the International Monetary Fund’s basket of reserve currencies.
The IMF approved that move, a longtime goal of Zhou’s, last year.
This year’s gathering, held at the French Finance Ministry, will include sessions on challenges to the international monetary system, global capital flows, the world financial safety net and monetary policy. Zhou, Lagarde and French Finance Minister Michel Sapin will speak at a press briefing at the event’s conclusion on Thursday.
The event was organized by the French at the request of China, which holds the G-20 presidency this year. China has made reforms to the world’s financial architecture a priority of its term, forming a working group chaired by France and South Korea to study the issue.
“China wants a much more closely managed system, where private-sector decisions can be managed by governments,” said Edwin Truman, a former Federal Reserve and U.S. Treasury official. “The French have always favored international monetary reform, so they’re natural allies to the Chinese on this issue.”
Key discussion points will include global currency coordination in a multi-polar world, as well as spillovers to emerging markets from Fed policy, a French official speaking on condition of anonymity said at a press briefing in Paris.
IMF staff members recently warned that the global financial safety net has become increasingly fragmented, making it harder to respond to crises in a world roiled by volatile capital flows. In a report released this month, the Washington-based fund said defenses haven’t kept up with the growth of external debt in recent years.
As a result, a system-wide shock could overwhelm the world’s crisis resources, which include nations’ foreign-exchange reserves, central-bank swap lines, regional funds such as the euro area’s European Stability Mechanism, and the IMF itself, the lender said.
One way to strengthen the safety net would be to expand the network of currency swaps between the world’s central banks, said Truman, now a senior fellow at the Peterson Institute for International Economics in Washington. During the financial crisis, the Fed opened swap lines with counterparts such as the European Central Bank, the Bank of Japan and the Bank of England.
But big central banks such as the Fed would probably face political resistance to extending swaps to emerging markets, Truman said.