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The “G20/IMF Communique”

After intensive discussions over recent weeks the heads of state and governments of the G20 couldn't agree on a statement. So they asked me to write it for them.


Nearly six years after the outbreak of the worst financial crisis in history, prospects for a full economic recovery remain elusive. Unemployment remains at very high levels, and standards of living for many people in developed countries are likely to fall over the first two decades of this century. Meanwhile, emerging markets remain vulnerable to any downturn in developed countries. With public budgets under strain everywhere, public sectors lack the resources with which to cushion further shocks. The process of balance sheet repair is incomplete. Many financial institutions remain on life support. Central banks continue to underpin the functioning of the financial system. Despite intensive work on the reform of financial regulation, it is doubtful whether the financial system is more robust than it was prior to the crisis. The IMF has drawn attention to the risks associated with a further prolonged spell of ultra-low interest rates and “MP Plus”. Fragmentation of financial markets could easily lead to rising protectionist pressures and physical controls. The 1930s serves as a warning of the dangers of inaction. Business and consumers are understandably reluctant to part with their cash.

The time for action is now. The global financial system (GFS) must be made fit for purpose.

No country can find a way out of the continuing threat of recession or avert a possible sharp slowdown in growth on its own. The reforms outlined in this Communique are aimed to provide businesses, households and national governments with a firm framework within which to plan future expenditures – a framework lacking at present.

Part 1:  Treat the GFS as a unit

We have reached outline agreement on objectives and have identified the means to achieve them. Fundamental reforms both of the banking/money market system and of the official international monetary system are required. The unit of analysis and of treatment is the international monetary and financial system – the global financial system.

Part 2: The Financial System

To this end, the G20 member governments have agreed that over a 10-year period starting this year all official financial aid to financial institutions will be withdrawn, along with lender of last resort support as all such forms of public support have been abused and are no longer affordable. We recognise that boards and shareholders of many banks and other financial institutions will conclude that in the new environment their institutions are not likely to be viable. We recognise also that absent state support, the financial landscape will change radically. The site on which a new financial architecture can be built has to be cleared by reducing the number of globally systemically important financial groups from the current number of 28 to zero. These comprise the too-important-to-fail, too influential-to-jail, and too-complex-to-manage banks. These financial dinosaurs stand in the way of recovery. Numerous scandals show they cannot be properly managed. There is no evidence of economies of scale to justify offering all financial services under one roof. It is quite clear that in recent years management of such banks have operated them primarily to maximise their own rewards. We believe that the large globally systemic banks which can exist only when implicitly or explicitly supported by governments also constitute a threat to the democratic process.

In the new environment, we expect that financial institutions will be funded primarily by equity rather than debt. We will eliminate all forms of tax and other discrimination that presently favour debt. We will encourage the formation of financing institutions under a variety of forms of legal and corporate types, including mutual, cooperative, partnership, mutual funds and free banking. There will be one criterion only: that they do not, and will not in future require support from the public purse. Deposit insurance systems will be withdrawn (small depositors will be protected during the transitional period). The structure of financial regulation will be dismantled. To equip citizens for a new world – more risky to them as bank clients but less risky to them in their capacity as taxpayers- financial education will be a compulsory part of the educational curriculum. Responsibility for monitoring the health of financial institutions will devolve on individual customers and users.

Part 3: Monetary policy

We agree that the models of monetary policy followed by governments and central banks have been among the major causes not only of the latest profound crisis but also of the cycle of crises since the end of Bretton Woods in 1971. Inflation targeting by central banks under flexible exchange rates appeared to meet with some success for a few years but then were shown to contribute to cyclical instability. So long as such models of independent monetary policy making are followed, the world economy will be plagued by speculative asset and currency bubbles, volatile cross-border flows of capital and erratic exchange rates. They do not allow policy makers to take into account systematically of the effects of their policies on other countries. The IMF spillover reports show this. Yet under current arrangements nothing can be done. Formal political coordination is unlikely to be productive. Central bank mandates remain defiantly national. So each nation loses out because the collective interest in a sensible outcome for the entire community is neglected. These sources of instability disrupt all normal and regular business. We will replace these inward-looking models with a new international monetary standard. This will mean an entirely new, outward-looking, policy environment and new mandates for central banks.

Part 4: the euro

The eurozone is a source of turbulence for the entire world economy. When the eurozone’s troubles threaten to overwhelm it, and there are fears of a possible break-up, the euro plummets against other currencies, giving an artifical boost to euro area exports and harming those of competitors; as soon as hopes rise of a solution to the eurozone’s problems, it soars, raising fears of recession in the eurozone. This imparts excessive volatility to the world economy.

 We recognise the desire of the members of the euro area to form a closer monetary union. They recognise that this is best achieved within the context of a stronger international system.

Part 5: A global monetary standard

In addition to the radical reform of banking and finance, an equally radical reform of the official international monetary is essential. What has been missing from the world economy for the past 50 years is a reliable, trusted, monetary standard. We have carefully considered various candidates for such a standard. To continue with a loose dollar standard is unacceptable for obvious reasons. One option would be to adapt JM Keynes’s original proposal for “bancor” (one possible way of doing this has been outlined by the IMF ). Another would be to adopt a version of the classical gold standard.

We have opted for a more radical alternative. Attached to this Communique is a technical description of the new global unit.