Mundell: New Currency System in The Future
Robert Mundell, known as the "Father of euro", appeared in China publicly again on November 1. In the “Annual Conference 2012: Retrospect and Prospect” hold by Liu Hongru Financial Education Foundation and SIFL INSTITUTE, Mundell not only reviewed the history of development of currency system all over the world but also drew currency blueprint in the future world in his idea: a brand-new international currency system composed of euro, USD and RMB.
Mundell firstly expressed that, one of root causes of American financial crisis in 2008 was the failing currency policy of American government. After the subprime mortgage crisis, America encountered the bigger financial risk because of the successive business failure of Lehman Brothers, AIG and some large banks so that the whole Wall Street was doomed.
This financial crisis made the huge currency turmoil in Europe and the decrease of economic growth. Countries of euro area could not deal with the risk using the currency devaluation as they did before the establishment of euro area. Thus, these countries should continuously increase the public debt, resulting in the European debt crisis. That is to say, the European debt crisis is related to the breakdown of international currency system and the exchange rate turmoil will lead to the economic downturn and financial turbulence. However, Mundell expressed that the debt crisis of an independent European Union country such as Greece should not be confused with the euro crisis. Main problem of these countries was that the social development model had already exceeded the financial operation capacity. “I think, as for Europe, not only a stable currency system, but also a good government management system is necessary,” he said.
Thus, with floating exchange rate between USD and euro, it will be difficult to establish a uniform and strong currency system, and only the euro system, the USD system can be established. However, no currency wants to be linked up with euro at present. USD itself has the serious problem in finance and its leading function is not enough. “In case that the exchange rate between USD and euro is fixed, 40% of the economies will become stable in this system. Upon this basis, RMB shall be included to establish a new global currency system,” Mundell said hopefully.
“From 1994 till now, I think the best policy in China is the stabilization of RMB value and connection between RMB & USD,” Mundell said. He thought that China was a country with great influences and had very huge government organizations. Thus it was not realistic to control expenditure cost in China like EU countries. In addition, the exchange rate between half the economies and the USD was relatively stable, having a positive impact on the global economic development. USD and RMB were always the key factor to determine the economic stability between Asia and America & other countries. In case that the exchange rate between USD and RMB fluctuated a lot, great harm would be brought to China and unstable factors will be brought to the global economy.
However, taking the difference between the national conditions of different countries, it is not mature to incorporate RMB into the international currency and to establish a now currency system. “We have to understand that different countries have different economic modes and different economic characteristics.” Ma Jun, managing director of Deutsche Bank and chief economist of the Greater China, expressed, “economic modes of many member countries of EU are similar but economic modes of China and America are different.” Ma Jun thought that China should carry out the promotion of reform of financial system including the adding of special drawing right system (SDR) step by step slowly.
(CHINA BUSINESS NEWS | 2012-11-2)
