Big Reform in Small Packages

BRUSSELS – France, which now holds the presidency of the G-20, has chosen reform of the international monetary system as its main priority for the Cannes summit in November. But is the issue worth the time and energy officials will devote to it? And where can such discussions lead?

When French President Nicolas Sarkozy announced his G-20 agenda a year ago, most expected that at end-2011 the world economy would be cruising at a comfortable speed. At the same time, burgeoning concerns about “currency wars” suggested that Sarkozy’s priorities were correct.

Unfortunately, other matters now call for more urgent attention: with the flagging global recovery and the mounting debt crisis on everybody’s mind, focusing on longer-term monetary reform might look like a distraction.

A case can be made, however, for keeping discussion of the issue alive. Indeed, deficiencies in the global monetary system contributed to several economic failings in recent years: excess global liquidity; over-accumulation of dollar-denominated reserve assets; uneven policy responses to current-account surpluses and deficits; resistance to necessary exchange-rate adjustments in the emerging world; and coexistence of inflation and deflation at a global level.