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Address by Nicolas Sarkozy, president of the French Republic:
Opening of the G20 Seminar on Reform of the International Monetary System

March 31, 2011, Nanking, China
[version française]

Ladies and Gentlemen, my dear friends,
Vice Premier,
Managing Director of the IMF,
Secretary-General of the OECD,
Ministers,
Governors,
Economics Nobel Prize laureate, Robert Mundell,
Professors,

I would like to tell you how happy I am to be with you today to open this seminar on reform of the international monetary system.

I would like to thank President Hu Jintao and all the Chinese authorities for welcoming us today in Nanking.

I had the opportunity yesterday during our meetings to again discuss France's priorities for the Presidency of the G20 with President Hu, and I noted that we share a similar vision of many essential topics for the future.
Vice Premier, thank you for agreeing to open this seminar.

Please allow me, first of all, to address my thoughts to the Japanese people and the solidarity we all feel for them in this particularly difficult time.

Vice Minister Tamaki, I would ask you to transmit to your Prime Minister the expression of our support and our solidarity.

The topic of concern to us today is crucial: building a more stable and more robust international monetary system is an enormous challenge, a collective challenge. This is why I was keen for Switzerland, Thailand and the Netherlands to join in our work, alongside the five guests already invited by the G20.

I would like to thank the China Centre for International Economic Exchanges, which worked to ensure that this meeting could take place under the best possible conditions.

I would also like to thank all the international organisations present today, the Managing Director of the International Monetary Fund, who has a crucial role to play in our discussions. I would also like to welcome the presence of eminent academics.

The G20 demonstrated its effectiveness in the recovery. Of course with this recovery there is a great temptation for each player to act solely for himself. During a crisis, the demand for coordination is strong. During recovery, the demand for coordination is less forthcoming. I am convinced that if we lose the impetus built up during the crisis, the world will, inevitably, fall back into instability and into crisis.

Nothing would be worse for the G20 than to act as if nothing happened and to give into the temptation of turning inward and adopting an attitude of every man for himself. This is particularly true in the monetary field. A few months ago, some commentators were talking of a currency war. Daily trends in the markets show us that currency volatility is still a source of very great instability.

France was keen for reform of the international monetary system to be a priority for the G20.

The international monetary system that we have inherited, based on floating exchange rates between the major monetary zones, has enabled us to absorb numerous shocks: oil shocks, financial crisis, debt crisis. It has also enabled the emergence of new reserve currencies. I am thinking, in particular, of the creation of the euro, which is the second leading reserve currency in the world.

But despite these successes, the international monetary system has also demonstrated its limits. It has not prevented the build-up of increasingly large international imbalances. In ten years, balance-of-payment disequilibriums have doubled. In ten years!

International capital movements have become more volatile. They expose the emerging countries to downturns that jeopardise their economic, social and even political stability. Since 1990, the world has undergone 42 crises resulting in sudden stops of capital flows in a country or zone. I would like to ask this question: How can the emerging countries manage their economic policy when they have been confronted, in a period of less than six months, with sudden capital outflows followed by massive inflows? How can anyone manage economic policy under such conditions? It's impossible.

Who could deny that the excessive volatility of currencies is harmful to growth and stability? Once again in this month of March we have experienced an exacerbation of volatility in the currency markets bearing no relation to economic fundamentals. The yen experienced unprecedented movements -- in March -, taking it to the highest level of appreciation against the dollar since the Second World War. In the space of barely three months, cher Tim, the euro/dollar parity rose from under 1.30 to over 1.40!

I ask this question: What changes in economic fundamentals can justify such sharp, rapid changes in parities between currencies? The answer is simple: there aren't any.

Faced with this instability, in an unstable world, what has happened? The need to accumulate reserves has grown. Ladies and gentlemen, between 2000 and 2009, the currency reserves of the central banks have done nothing less than double and now stand at 6.5 trillion dollars. They have doubled since the year 2000! The accumulation of currency reserves can be justified in certain cases, but it is also costly. The downside is poorly managed supply of reserve assets, which are insufficiently diversified.

Faced with this absolutely indisputable situation, there are two possible reactions: the every man for himself attitude -- and in this case, there will be a currency war hence new crises -- or cooperation and coordination.

The international monetary system must gradually, Vice Premier, evolve to reflect the major trends in the world economy that we have observed.

As major emerging countries of the G20, you alone represent almost one quarter of the world economy. In ten years' time, you will represent 50% of the global economy. The world is multipolar. This is why I was keen for this seminar to take place in China. This multipolar economic world calls for a multipolar monetary world.

The emerging countries account for a quarter of the global economy. In ten years' time, you will represent half of the global economy. Who could imagine that the economy could change that much and the monetary system would stay the same?

The G20 has taken these changes on board by reforming the governance of international financial institutions. But it must also take them into account when changing the organisation of the international monetary system.

We hope, ladies and gentlemen, that you will be able to arrive at a common diagnosis, because once we agree on a diagnosis, we can then carve out avenues for reform, together.

I would like to be clear about the ideas that the French Presidency of the G20 wishes to promote.

The idea today is not to return to a system of fixed or administered exchange rates. That would be a complete mistake and would mean taking a risk of very sharp adjustments and, finally, for the countries concerned, a loss of autonomy as concerns their economic policy. Nobody wants that to happen.

It is clear that we must evolve towards a more flexible exchange rate system. Why more flexible? So that it can withstand the shocks of the world economy. But this flexible exchange system cannot evolve without rules, without coordination, without supervision, since instability would prevail. Yet when there is no coordination, there are no rules and no supervision. Without rules, the international monetary and financial system is incapable of forestalling crises, financial bubbles and the widening of imbalances. Without rules and supervision, the world will suffer recurrent crises that are increasingly serious and severe. Over the last ten years, growth volatility has doubled.

It is because we are keen to move towards greater flexibility in exchange rates that we must define new rules of operation for the international monetary system. And if you don't do it, nobody will do it for you, for us. If we don't do this now, we'll have to deal with it when it is too late, in other words, when we are in the midst of major crises of the international system.

So what does this require? First and foremost, coordinating our economic policies within the G20. Reducing major imbalances is the major challenge of the Framework for Strong, Sustainable and Balanced Growth that we defined in Seoul.

In Paris, in February, under the chairmanship of Christine Lagarde, whom I would like to commend, you agreement was reached on the indicators for these imbalances. In April, in Washington, cher Tim, we will discuss the "main guidelines." And let there be no doubt about the commitment of the French Presidency to further advancing down this path.

I hope that we will rapidly reach agreement on the methods. And the method does not mean insulting each other, it does not mean criticizing each other. It does mean understanding each other's problems and knowing that our salvation lies in working together, not against one another. In Cannes, at the G20 Summit, I hope that we will reach agreement on this concerted strategy.

Moreover, I am convinced that the supervision exercised by the IMF must not only concern national economic policies, but also their impact on other countries, and in particular, through the financial channel.

The liberalisation of capital movements and flexible exchange rates is one of the established facts of the last 20 years.

The capital movements that ensure effective allocation of capital are accompanied by a greater risk of massive outgoing and incoming flows of capital that can have destabilising effects.

We may each be tempted to protect ourselves by means of unilateral measures. This means we must avoid two dangers. First, the naive belief that liberalisation of capital movements is sufficient to ensure economic equilibrium, whatever the circumstances. France does not share this idea. Let's not forget that the crisis in Asia in the 1990s was exclusively the result of unbridled -- I might even say doctrinaire -- liberalisation of financial flows!

The other danger to avoid is the risk that a proliferation of unilateral measures, precipitated by times of crisis, might lead to a new financial protectionism that would be harmful to all our economies.

We will avoid these dangers by adopting, unwaveringly, the path of multilateralism. A code of good conduct, strong guidelines and a common framework governing the possibility of implementing capital controls where necessary must define the conditions under which restrictions on capital movements are legitimate, effective and appropriate to a given situation.

If we agree on these rules, ladies and gentlemen, it will be a major evolution in the doctrine of the IMF, to the benefit of the emerging countries, which suffer from excessive volatility of capital movements. Is it reasonable, today, given the increasing impact of capital movements, that the IMF can issue recommendations to a country only as concerns its current account balance of payments and not concerning its capital account? I would like someone to explain to me why a recommendation about one is legitimate and a recommendation concerning the other is illegitimate. Expanding the supervision of the IMF to include these aspects strikes me as crucial. In the longer term, France -- and I'm saying this now - is favourable to a modification of the IMF's Articles of Agreement to broaden its supervision mandate. Yet if we decide on more coordination, more rules and more supervision, we then need to decide which organization is in charge of enforcing such rules and conducting such supervision. For France, it's clear. It's the IMF.

The 2008 crisis showed us how essential liquidity is to ensure satisfactory operation of the world economy. If it disappears, the whole of our financial and economic situation is put in peril. I am convinced that reform of the international monetary system is the natural extension of the reform of the international financial system that we have initiated with the new Basel III prudential framework. What use is Basel III if we ignore the monetary system? And who could think that regulating the financial system is sufficient without addressing the monetary system issue? That would make no sense.

We have taken decisions: monetary cooperation agreements and the exceptional allocation of $250 billion dollars in Special Drawing Rights (SDR), the third such initiative in the history of the IMF. I would like to take this opportunity to commend the Korean presidency.

However I believe that today we must give ourselves the wherewithal to consolidate such progress.
We first need to ask ourselves some questions. Are the liquidity instruments available to us appropriate? Everyone knows that we need liquidity, but do current instruments work? Who can answer yes to that question? Are they sufficiently flexible? Who thinks we should say they are? Are they reversible? Do we need to come up with other liquidity instruments? Should we expand their scope to be able to respond to a systemic crisis affecting an entire region instead of a country?

In recent years, regional liquidity support agreements have been set up. I am thinking of the Chiang Mai initiative in Asia, but also, more recently, of the euro zone instruments. Haven't we, the euro zone countries, joined together to create liquidity and address the crisis?

I would also like to see international organisations and development banks expand their actions.

We must also act to ensure that the accumulation of precautionary reserves we have seen in several regions of the world becomes less necessary. I mean that there is a risk of scarcity of reserve assets. We saw in the crisis, exceptional and contingent allocations of SDRs can be effective. I think it could also be useful to give the IMF the capacity to raise debt in the markets to meet the financing needs of countries in the event of a crisis -- with all the necessary safeguards to protect the Fund's resources.

We must accompany the inevitable internationalisation of the major global currencies. This does not of course mean, cher Tim, challenging the important role of the dollar, nobody would think of doing that-, and the euro, which must be stable currencies. But the internationalisation of some other currencies is already a reality, Vice Premier; I am thinking of course of the yuan and I welcome the ambition of the Chinese authorities in this respect.

But isn't it the time today to reach agreement on the timetable for enlarging the basket of SDRs to include new emerging currencies, such as the yuan? Who could deny the major role the yuan plays in the international monetary system? Tribute is thus paid to the economic power and the political power of China, a major monetary power.

Lastly, the recent events in Japan further demonstrate the importance of international coordination in the question of exchange rates. The action of the G7, chère Christine, on the yen enabled us to counter speculation disconnected from the fundamentals, which threatened to exacerbate the difficulties of our Japanese friends at a time when they are confronted with events of extraordinary gravity. What happened was unacceptable.

Concerted intervention is an essential way of protecting the international monetary system against deviation and excessive volatility. It is, of course, an instrument of last resort, but it is only effective if it is used in a genuinely coordinated manner.

This is what the G7 is for. But China is not a member of the G7. Is it normal that there isn't a forum in which all the major currencies can discuss the international monetary system together? Isn't it time to think about establishing one?

Ladies and Gentlemen,

For 2011 to mark a decisive milestone in the reform of the international monetary system, the French Presidency of the G20 expects a great deal from your discussions. I am well aware that we will not resolve all the problems in one year, and the Vice Premier is right, but we must make progress starting today if we wish to avoid new crises or new summits in which surplus countries pit themselves against deficit countries, or in which deficit countries denounce surplus countries. What can we expect to gain from such discussions? Nothing. Nothing but new crises. The Seoul G20 Summit entrusted us with a mandate, for which I am responsible as President of the G20. I know it's difficult, I know we can't reform a system that dates back to Bretton Woods just like that, but ladies and gentlemen, if we don't do it, nobody will. If we don't do it now, it will be much more difficult to do in the future. Let's agree on a diagnosis, let's start working together. If we coordinate our policies, we will be able to respect our sovereignty over our economies. And if there is no coordination, there will be the pressure of speculation and crises, which will in turn compromise the sovereignty over our economies. You can see that France has considerable ambitions for your seminar, but I'm sure that given the quality of participation, it will yield outstanding results.

Thank you.

Source: French presidency of the G8-G20

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