The Palais Royal Initiative (PRI) was a self-christened group of 18, formed in September 2010, to diagnose the great collapse of September 2008, and prescribe the directions for reform of the international monetary system. Led by Michel Camdessus, Tommaso Padoa-Schioppa, and Alexandre Lamfalussy, the group came up with 18 suggestions in their final report. The volume under review presents the report along with select background material, supplemented by papers from some invited commentators.
A frank introductory sentence by the three leaders is worth quoting in its entirety: “The crisis that engulfed the global economy in 2008 caught most experts and policymakers by surprise, bringing to light a number of hitherto unnoticed vulnerabilities.” (emphasis added). All the three were major figures — in either executive or advisory capacities — in the high world of international finance before and during the crisis.
Camdessus was Managing Director of the IMF during 1987-2000 and Honorary Governor of the Bank of France in 2008. Padoa-Schioppa was Chairman of the Ministerial Committee of the IMF (IMFC) during 2007-08. Lamfalussy was Director-General of the Bank for International Settlements during 1985-1993, and a key architect of the financial services regulatory structure adopted by the European Union.
Vulnerabilities
Although the group's report does wear the abashed air of leaders caught fiddling while the world was building up to the 2008 conflagration, only one of the papers, by senior IMF staffer Jack Boorman (an editor of this volume), frontally addresses the issue of why some vulnerabilities remained unnoticed, even from key vantage points.
What about the vulnerabilities they did notice? The leaders do not document their attempts to reform the system from within, and where the obstructions to reform lay. The PRI admittedly set for itself the objective of quickly getting on with the task of reform, and was not cast in memoir mode. In fact, the latter might have served better to underscore why the necessary reforms, even when clearly known, never happened.
The 18 suggestions for reform are grouped under four objectives. The first objective is stronger IMF surveillance. However, the tighter surveillance norms suggested are confined to conventional macro indicators and do not cover fresh ground. It is one of the invited papers, by three Munich-based academics, Hans-Werner Sinn, Teresa Buchen and Timo Wollmershauser, that places financial sector prudential regulation squarely at the forefront of reform.
The second objective is to foster exchange rates broadly in line with global balance and country fundamentals. The suggestion that the IMF should develop globally sustainable exchange rate norms is fraught with national sovereignty issues. Whose deviations from the norm would come up for examination in the first place, and how would correction be enforced? The power imbalance between nations underlying the global crisis comes to the fore here again.
Ensuring adequate global liquidity is the third objective. The suggestions in this section do cover fresh ground. The unilateral use of capital controls by member-nations to prevent disorderly exchange rate movements or financial instability is sanctioned, reflecting no doubt the influence of Y.V. Reddy who was a member of the PRI. It is further endorsed by the French academic, Michel Aglietta, in an invited paper.
Key reform
The fourth and fifth objectives, which relate to the international numeraire currency in trade and finance and to the governance of the international monetary system, represent the key reform directions needed. Two papers, one by group member Xiaolian Hu, a former Deputy Governor of the People's Bank of China, and an invited paper by Pietro Catte, chart the way by which the SDR could develop into an International Currency Unit (ICU), usable both as a unit of account and as a medium of exchange in international trade and investment. There is, however, a counter paper by Peter Kenen, also a member of the group, who thinks the SDR can at best become the principal reserve asset.
The report proposes a three-tier architecture for better governance of the International Monetary System (IMS). The key middle-tier proposed is a Council of Finance Ministers and Central Bank Governors, which will combine in itself the functions of the Ministerial Committee of the IMF (IMFC) and the G-20. The Executive Directors forming the third-tier will be in charge of implementation.
The volume is dedicated to Padoa-Schioppa, who died when the PRI deliberations were still on. He was adviser to the Prime Minister of Greece when he passed away. Greece and the world remain mired in the search for solutions.
REFORM OF THE INTERNATIONAL MONETARY SYSTEM: Edited by Jack T. Boorman and Andre Icard; eds., The Palais Royal Initiative, Sage Publications India Pvt. Ltd.,
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