By Angelo Federico Arcelli
Seventy-five years ago, as World War II raged, the conference of Bretton Woods paved the way to the creation to the new financial order to be put in place once the conflict had subsided. At that time, the initiative was in the hands of the Allies, and in particular the United States. What came out of that conference was a scheme that governed currencies, trade and development for many years to come. Notably, it decided to establish the International Monetary Fund (IMF) as a guardian of financial stability (and trade, given that no World Trade Organization was in place at that time).
The end of the Bretton Woods regime arrived on August 13 ,1971, when the United States decided to end the era of the Gold Exchange Standard, by de-pledging the dollar from the original agreements of convertibility, and, also, by signing a deal with Saudi Arabia about exclusive trade of oil supplies in U.S. dollars. Between 1971 and 1973, Western European countries were forced to give up the convertibility of their currencies as well, and exchange rates started to float.
However, the Bretton Wood basic architecture remained implicitly valid. While there was no pledge that the U.S. dollar would be at the center of the international system of exchange of currencies, de facto it remained by far the reserve currency for the world. Europeans were forced to find a new scheme for financial stability, and this happened with the 1973 Werner plan that gave birth to the EMS scheme (centered on the West German Deutschmark), a photocopy of the previous transatlantic scheme based on the dollar, and all European. While such new stability aimed at being an alternative to the dollar-centric system, that was more the appearance, since it encompassed the dollar as implicit reference and international currency (also given that 80% or more of international reserves remained in dollars).
Recent history tells us how this European system seemed to be stable, despite several realignments among strong and weak currencies. It developed a new figurative currency, the ECU. Then, with the Delors agenda and the Treaty of Maastricht, the decision to create, in April 1998, a new European Central Bank and a single currency, the euro, to be circulated as paper bills as of January 1, 2002, changed the landscape. But, again, only apparently.
The spirit of Bretton Woods was always there. Only Europeans had a new European currency pledged to inflation (at the place of a mechanism pledge on the D-Mark, in turn pledged to an inflation target). And the dollar remained fully free to fluctuate according to the needs of U.S. monetary policy. The IMF remained the guardian in the event of crises, and the Europeans created also a sister institution, the ESM, to reinforce the same methodological approach in case of need.
As the euro was born with no single Treasury behind it and relies on a central bank that has a very narrow target of price stability, it seemed only a step towards the inevitable European political union. And today, in a moment of new crisis for an unexpected pandemic, we seem to question the capability of the international financial community and capitalist world to survive the shock, but also the future of current European architecture and of the euro itself, if no political perspective is put again on the table.
Among the consequences of the Covid-19 pandemic there will surely be a new global economic crisis. In contrast to the last crisis of 2008, however, governments do not have the same margin for maneuver that they did, and central banks are full of sovereign bonds and have little or no option to change current economic policies. Instead, they have to declare they will maintain such policies and further expand the supply of available money.
What would happen if a new crisis unleashed a sudden inflationary shock to advanced economies? Inflation would be something unconceivable in Europe and a major concern for stronger European economies. And the likely issue is that, should no effective means prove to be available to cope with such a risk, the very credibility of our currencies will be at stake. Only a coordinated effort to reconstruct the global monetary system in a new deal could avoid a very costly “financial war,” which Europeans in the first place are likely to lose in terms of how to sustain, in the long run, the level of wealth we enjoy today.
In the absence of a clear perspective coming from Europe, Western countries need to think now for the long term. And to imagine, as it has been done at the end of WWII, what will be the form of the financial sector worldwide, what will be the system allowing stability, trade and the recovery of a path to growth. This is not just the problem of Europeans, or of Americans, or of anyone else around the world, it is the problem facing all of us.
We now need to rethink a new scheme for the years to come, which can be only created if a new Bretton Woods initiative is promoted, involving all main economies. As a first step, the initiative should come from a new EU-US Transatlantic agreement.
Angelo Federico Arcelli is a Senior Fellow at the Transatlantic Leadership Network.