Currency Wars, Capital Controls, and the Outlook for the International Monetary System

The discussion at the Council on Foreign Relations' Stephen C. Freidheim Symposium on Global Economics focused on the challenges of maintaining a stable international monetary system in the face of currency wars and capital controls. Speakers emphasized that orderly resolution mechanisms are difficult to implement, especially in times of panic, and that the European Union's attempt to balance the risk of allowing countries to fail with the need to reassure investors may ultimately force them to revisit their deposit insurance scheme. The speakers also touched on the potential consequences of imposing countervailing duties on countries with undervalued currencies and the implications for global imbalances.

Key Takeaways:

• The EU's attempt to balance the risk of allowing countries to fail with the need to reassure investors is fraught with difficulty, as seen in the Irish case, where panic and public pressure led to hesitation in implementing a resolution mechanism.
• The EU's current approach to deposit insurance, which allows for some risk to be transferred to private investors, may be forcing them to revisit their scheme, similar to the U.K.'s experience with Northern Rock.
• Orderly resolution mechanisms are crucial in maintaining financial stability, but are difficult to implement, especially in times of panic.
• The imposition of countervailing duties on countries with undervalued currencies may lead to a currency war, which could have unintended consequences, including a trade war.
• The European Union's current approach to capital controls is similar to the U.K.'s deposit insurance scheme before the crisis, which may ultimately force them to revisit their strategy.

Statistics:

• 90% of deposits in the U.K. were insured, but depositors still ran for their 10% uncovered deposits during the Northern Rock bank run.
• The EU's deposit insurance scheme currently allows for some risk to be transferred to private investors.

Sources:

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