1. The Politics of International Economic Relations: Session 7 5 December 2006

2. Evolution of the International Monetary and Financial System Financial and monetary order prior to WW2 Creation of the Bretton Woods Order: Text Ikenberry Bretton Woods Order The 1970s crisis From floating exchange rates to monetary unions Contemporary issues of the financial and monetary system –US$ declining role? –International financial crises –Crises prevention and crises management

3. Financial and monetary order prior to WW2 Capital flows in late 19 th century Facilitated by integrated monetary regime (fixed exchange rate regime / gold standard) Regional monetary unions (LMU and SMU) and imperial currency blocs Prior to WW1: abandoning of gold standard (floating) 1920s attempt to restore gold standard 1930s financial crises (collapse of international lending and gold standard) Collapse of US lending and Smoot-Hawley Tariff Act Reintroduction of capital controls

4. Financial and monetary order prior to WW2 HST: why did US not take on leadership? Criticism: –Overstatement of UK leadership in pre-1914 order –Cooperation between leading central banks –Domestic politics (e.g. balance of payments deficits deflationary policies (press wages and prices downwards)) –instead depreciation of national currency

5. Creation of the Bretton Woods Order Embedded Liberalism –US leadership (liberal multilateralism and New Deal politics) Different kind of Gold Standard –Gold-Dollar standard ($35 per ounce) –Adjustable Peg Exchange Rate Regime (Currency realignments) –Acceptance of capital controls (targeting speculative flows, protecting against capital flight) Creation of IMF/World Bank (IMF: lending - previously left to private banks; WB: long-term loans for reconstruction)

6. Explaining Order (Ikenberry) Role of expert consensus How to explain the agreement (power distribution, interests, which of the postwar orders to choose) Hegemony, legitimacy? What was the glue that held the Anglo-American coalition together? Policy ideas inspired by Keynesianism embraced by British and US economists and policy specialists, Ideas resonated well with the larger political environment Not an epistemic community Constitutional moment

7. The 1970s crisis Breakdown of gold exchange standard Triffin Dilemma (standard is unstable) –Liquidity expands by running US balance of payments deficit, undermining confidence in $ convertibility –(Special reserve currencies (e.g. special drawing rights)) 1971 end of US convertibility of US$ into gold US financing through printing $ Decision: cut back printing vs. ending convertibility End of benevolent hegemon? Declining hegemony?

8. The 1970s crisis Collapse of adjustable peg exchange-rate regime 1973 floating system (formalized in IMF in 1976) Problems of speculative money, heightened capital mobility and reconsideration of merits of floating (ideas)

9. From floating exchange rates to monetary unions Exchange Rate Management (Plaza Agreement) –1980 Appreciation of US$ (large inflows, high interests rates, account deficit, protectionism) –Short G5 management to depreciate US$ Creation of EURO –1979 European Monetary System (mini Bretton Woods), adjustable peg system –1988 capital controls eliminated, speculative attacks –1992/3 currency crises (need to give up monetary policy) –Creation of monetary union (also role of neo-liberal ideas) –Limits on budget deficits and public debts (Maastricht Criteria) Currency Unions elsewhere –CFA Franc Zone, Dollarization (Ecuador, El Salvador) Cross-national regulatory coordination

10. Impossible Trinity Capital Mobility Fixed Exchange Rates Autonomy of Monetary Policy Gold Standard Since 1970s Bretton Woods

11. Contemporary issues of the financial and monetary system US$ declining global role? (EU, Japan, internally?)

12. International Financial Crises Global financial panic of the late 1990s (e.g. Thailand) In search for higher returns Heavy borrowing – debt in local currency Confidence in countries ability to defend exchange rate Speculations Pull-back, liqudity crunch, currency devaluation Central bank tries to defend, sells foreign currencies Herding behaviour Bank runs IMF: emergency funding – borrowing with conditions attached Political and social unrest Spill-over – contagion

13. Frequency of Financial Crises Most damaging crises occur when banking system and currency markets simultaneously come under pressure

14. Frequency of Financial Crises

15. Crises Prevention and Crises Management Crises prevention: Standards and well-functioning regulatory authorities (e.g. banking regulation, financial intermediaries) Cross-national coordination (IMF, BIS, IOSCO, G7/G8, FSF, G20etc…) IMF: early warning system Moral hazard

16. Crises Prevention and Crises Management Crisis management: –Emergency lending –Debt rescheduling and restructuring A new global architecture? –Unilateral –Multilateral –Supranational

17. Decision Making IMF/WB Consensus Shadow of Majorities (51%, 66% or 85% is required) Voting Power US 16.83 Japan 6.04 Germany 5.90 France 4.87 United Kingdom 4.87 China 3.67 Saudi Arabia 3.17 Russian Federation 2.70

18. Voting power

19. IMF and WB as an IO Woods 2005