Multilateral Rule-Based Trade and Exchange Rate Regimes

The role of the Group of Eight (G8) is that of international coordination, not of imposing rules on participants. Its consultative nature, however, does not preclude the improvement of mutual rules and the functioning of the market. An international challenge G8 countries are compelled to face is that of reserve currencies (i.e. the US dollar and the euro according to the official BIS statistics), with a flexible exchange rate between them, along with an emerging currency (the yuan-renminbi) pegged to the dollar and some currencies with a dirty exchange rate regime. The result is that global competition is distorted by “artificial” foreign values of national currencies, which permit an accumulation of an enormous current account surplus and a consequent stockpiling of foreign exchange reserves. The use of these reserves for gaining political influence transfers the problem from the area of geo-economics to that of geopolitics, forcing the G8 to figure out a solution. The progressive trade liberalisation forces the adoption of flexible exchange rates. But large emerging countries are considering alternative solutions in order to maintain their trade surplus and increase their foreign exchange reserves. Moreover, they do not want to lose the political power implied by such a high amount of sovereign currency and bonds. The G8 should address this situation and push for a solution to the Doha Development Agenda.Empirical evidence supports the idea that a devaluation of the US dollar could not improve the American trade deficit, nor could it significantly decrease the emerging countries' surplus and reserves, but would significantly damage European exports. The solution to the three problems — different exchange rate regimes, excessive official reserves held by non-US residents, revaluation of the euro regardless of balance of payments equilibria — cannot be solved by the market. This conclusion is supported by the consensus that has emerged on money creation after 200 years of dispute among academics, bankers and political groups