France to revise current global monetary system

42737.jpegWhile serving as the chairman country of the G20, France wants to revise the current global monetary system and encourage countries to diversify the portfolio of reserve currencies, said Christine Lagarde, Minister of Economic Affairs, Finances and Industry of France. The control over financial flows in the process of diversification should be granted to the International Monetary Fund.

According to Reuters, Lagarde believes that the world powers should abandon the outdated ideas of forty years ago and stop treating the dollar as the major reserve currency. A balanced portfolio of reserve currencies, by contrast, would reduce the imbalance and help restore the countries' economy, said Lagarde.

According to Lagarde the IMF should control financial flows because, in her words, unilateral actions are fraught with risks. However, so far countries are doing it on their own.

In particular, the Ukrainian government has recently announced its intention to expand the country's foreign exchange reserves adding the Russian ruble. The Russian ruble is a part of the currency reserves of Belarus which is Russia's active trade partner. At the same time, Russia's currency basket consists only of the euro and the dollar.

Lagarde's idea is neither new nor revolutionary. Expansion and diversification of the currency portfolio is quite a standard measure, especially in the context of growing uncertainty about the global financial system. If one currency gets more expensive or cheaper, then it affects other currencies as well. Thus, opening up positions in other currencies may theoretically protect from substantial losses.

At the same time, the cross-exchange quotations, that is, assessing the market value of two currencies in relation to each other through their direct quotations against the dollar should be abandoned. However, it will naturally retain its relevance as a tool for analysis. But then the question arises: how many pieces of paper issued by a bank in one country will be sufficient to buy the goods offered by another country? This is the traditional question of value, which should be reduced to something understandable and clearly estimated by the participants of the transaction.

It may be gold, which, incidentally, was stated by head of the IMF, Robert Zoellick. This structure, according to French Minister of Finances should play an important regulatory role. Textbooks are considering gold as an old form of money, but markets still use the metal as an alternative monetary asset, Zoellick wrote, offering to give gold a special role in the new financial system. Creation of a new monetary architecture will not be fast, but this work must be commenced now, he said.

In his article in The Financial Times Zoellick proposes to create a five currencies system, which will include U.S. Dollar, Euro, Yen, Pound and Yuan, and tie them to gold as the new international standard. Thus, Zoellick rejects the dollar reserve status, but offers to take away its status of the measure of value.

Meanwhile, the Euro, the Yen, the Dollar and the Yuan are already fighting a currency war. The most serious fights for the devaluation are led by the Dollar and Euro. U.S. uses quantitative easing. The fact that the Dollar will strengthen in the coming year will be declared by a number of analysts, including particularly informed Goldman Sachs Group Inc, the ex-members of which now drive the Federal Reserve. The currency of the EU is pressured by the debt issues of some countries of the Union - this information weapon is successfully used to reduce the market value of the Euro.

Expanding portfolio of reserve currencies looks like a way to allocate risk precisely in terms of currency wars. The Kremlin has expressed support for the development of multi-currency basket.

"Time will tell how valid our predictions are, however, it seems to me that the future belongs to the global financial system over the use of different reserve currencies and the creation of a multi-currency portfolio. Three or five years ago, any negotiations on this subject seemed a fantasy beyond reality. However, an important milestone has been reached, and we are seriously discussing this issue at the global level, with numerous countries, including our American partners who, perhaps, is the least interested party in the emergence of other reserve currencies in place of dollar," stated in June Russian President Dmitry Medvedev.

Anatoly Miranovsky

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Author`s name Dmitry Sudakov