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Reform of the International Monetary System

This contribution develops a blueprint for a European fiscal union. We argue that a viable European fiscal union can be constructed without joint liability for public debt or a centralized government with a large common budget. Such a fiscal union should combine elements of market discipline with stabilization in case of asymmetric shocks. Our proposal addresses the shortcomings of most other reform designs, which fail to offer a solution for insolvent or non-cooperative euro countries. We suggest a design which combines limited fiscal insurance with an orderly procedure to restructure the debt of insolvent member states. We show that fiscal insurance and a sovereign insolvency procedure are no contradiction but, on the contrary, are mutually reinforcing. Effective fiscal insurance helps to limit the stability risks involved in the implementation of an insolvency regime for sovereigns. And vice versa, a well-defined insolvency procedure reduces the risk that a fiscal capacity motivated as an insurance against transitory asymmetric shocks degenerates into a permanent transfer system. Moreover, we show that both elements promote the functioning of the European banking union and the new European fiscal governance.

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Reconciling Insurance with Market Discipline: a Blueprint for a European Fiscal Union

In the aftermath of the Eurozone crisis, proposals to share the risk of unemployment shocks have been high on the political agenda. Welfare states have built-in automatic stabilisers to cushion economic shocks, notably unemployment insurance. The argument with regard to the Eurozone is that a monetary union needs mechanisms to buttress or complement the automatic stabilizers of its member states; support for national unemployment insurance might achieve this. However, are European citizens ready to share the risk of unemployment crises hitting their countries? This report sheds light on that crucial, yet unresolved question by conducting a conjoint survey experiment on public support for European unemployment risk sharing (EURS) among a representative sample of 19641 respondents in 13 European member states in October and November 2018. The conjoint experiment studies citizen preferences for policy proposals, implementing EURS, that vary on six dimensions: (1) generosity, (2) education and training conditions, (3) between-country redistribution, (4) national versus European administration, (5) impact on taxes, and (6) conditions with regard to individual job search effort. Our results show that policy design matters for public support. They also highlight variation across countries and socio-economic and ideological differences among citizens. Most importantly, fundamental opposition to EURS is confined to a small segment of the European population. In all countries in the sample, there are potential majorities for specific policy packages that organize EURS. A summary of the report (15 pp.) is available in German, French, Italian and Dutch. Click EURS Report and you will find, under the heading Materials, these summaries.

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Risk Sharing When Unemployment Hits: How Policy Design Influences Citizen Support For European Unemployment Risk Sharing (EURS): Policy report

Does a monetary union, for it to be successful, impose limits on the diversity of labour market policies and institutions in its member states? I argue that one should not overstretch functionalist arguments in this matter; the problem at hand is political and the challenge is to identify common standards and policy rules that are functionally relevant (taking on board a combination of arguments on what a wellfunctioning monetary union requires) and legitimate in view of shared aspirations across the member states. What is ‘needed’ and what is ‘imposed’ by monetary unification in Europe, depends on the fundamental aspirations that drive the European project at large. Already in the 1990s, reform in labour markets was justified by the advent of the monetary union. The European Employment Strategy emphasised supply-side flexibility: an agenda for flexible labour markets was interwoven with an agenda of investment in individual labour market opportunities and the development of ‘enabling’ policies. This essay develops a broader argument: to sustain a wellfunctioning monetary union that serves the EU’s aspirations, we need a consensus on labour market institutions that support symmetry and stability. Therefore, collective action and ‘protective’ policies are in order. Enabling and protective policies can be mutually reinforcing, in creating resilient social systems. With regard to symmetry, the member states need labour market institutions that can deliver on wage coordination; this limits the diversity of social systems cohabiting in a monetary union, since it excludes totally decentralised and uncoordinated bargaining. Institutions that monitor competitiveness should be embedded in social dialogue, and distributive concerns should be mainstreamed in the monitoring of competitiveness. Mainstreaming distributive concerns into competitiveness makes the ‘assignment’ for national social partners complex and challenging, but such an encompassing approach may stand a better chance to achieve legitimacy.

Structural Convergence vs. Systems Competition: Limits to the Diversity of Labour Market Policies in the EMU

The China–US trade war during 2018–2019 has attracted attentions from academics, policy makers, businesses and investors around the world. Unlike previous researches which are mainly based on hypot...

The effects of the China–US trade war during 2018–2019 on the Chinese economy: an initial assessment

The euro area will not have a centralized budget, and smoothing of country-specific asymmetric shocks via private financial markets will develop only slowly. Mistrust among the governments has caused rigid, even pro-cyclical, fiscal policies. Smoothing mechanisms are absent due to the fear that the transfers would develop into permanent redistribution. For removing these deficiencies, we propose a transfer mechanism to be managed in periods of 7 years so that the cumulative balance of each country is cleared in equal instalments during the subsequent 7-year period. The transfers would smoothen asymmetric shocks and alleviate the rigidity of the fiscal rules.

Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: a Simple Proposal for Dealing with Mistrust

On 19 June 2010, the Chinese authorities announced that the renminbi (RMB) was henceforth to be managed with reference to a currency basket. Yet, it has subsequently quite closely followed the USD, although having appreciated gradually by 7.7 per cent up to the time of writing. The details of the composition of the basket have not been announced. Despite having appreciated against the USD, the RMB became first significantly weaker against a broad trade-weighted basket, and the EUR and the JPY, and this situation held until September 2011. China has announced at international forums that the RMB exchange rate regime will be reformed further. We discuss here what a transparent basket peg could mean for China. To reduce the overall volatility of the RMB exchange rate, the weight for the EUR should be significantly increased, with the special drawing right basket being one option for practical implementation. This would also have a positive impact on the EU. China's currency reform has possible implications for its USD-dominated asset holdings. Reducing them could trigger a further depreciation of the USD. The potentially costly consequences call for new rules for the global financial architecture. However, China's economic expansion will inevitably lead to a diminishing international role for the USD.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2065068

Re-pegging the renminbi to a basket: issues and implications

Pegging the renminbi (RMB) to the US dollar since 1994 has characterised China's exchange rate policy under a fixed peg or appreciating crawling peg. The current policy, announced in June 2010, of ‘floating with reference to a basket’ made the RMB 25 per cent stronger against a trade-weighted basket by early August 2015, while it was 10 per cent stronger against the US dollar. Thus, 14 percentage points arose from changes in the cross rates of the other currencies, notably from the fall of the euro since December 2014. Devaluation of the RMB by 3 per cent in August 2015 just covered the effective appreciation since December 2014. Effects of the cross rates of other currencies could be eliminated by managing the external value of the RMB with reference to a genuine trade-weighted basket. This could be a suitable intermediary exchange rate regime for China, as the risks associated with free floating are still great. Diversifying further the currency composition of the foreign exchange reserves and other foreign assets of the Chinese government, from US dollars towards euro and yen assets, would be a natural parallel shift. The euro–US dollar–yen exchange rates in late summer 2015 may offer a good opportunity to carry out this move.

Heikki Oksanen

Papers

Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: a Simple Proposal for Dealing with Mistrust

Re-pegging the renminbi to a basket: issues and implications

Managing the renminbi: should China peg to a trade-weighted basket?