France to Seek G20 Overhaul of Global Monetary System

France will start talks on overhauling the global monetary system during its G20 presidency to improve policy coordination and stem capital flows distorting exchange rates, Economy Minister Christine Lagarde said Thursday.

France will take over the chair of the Group of 20 biggest developed and developing economies in November for the next 12 months at a time when many countries want to prevent their currencies from strengthening in order to help economic recovery.

“The international monetary system … as it stands at the moment does not seem to be particularly effective,” Lagarde said in a speech to the Carnegie Endowment, a Washington think tank. French President Nicolas Sarkozy has made similar comments.

“If you look at the variation of currencies that are taking place … if you look at the liquidity that moved around without much control in some cases, if you look at capital flows in and out of developing countries in particular, clearly there is an issue,” she said.

“If you look additionally at the latest moves that are taking place, whether from Brazil or from Japan for instance, let alone from China, you really wonder what kind of coordination there is,” she said.

Brazil doubled the tax on foreign purchases of its paper to curb foreign capital inflows into its treasuries and stem the rise of the value of its real currency.

Japan intervened in currency markets last month to weaken the yen, which drew criticism from Europe that the move had not been coordinated as in the past.

Without referring specifically to currency intervention, Lagarde said France would seek to improve policy coordination. “(There) is a need to coordinate, and coordinate better, because decisions that are unilateral are not going to be as efficient as if they were made, as in the past, on a much more concerted basis,” she said.

China has long been keeping its yuan currency undervalued against the dollar and the euro to give its export-driven economy a competitive advantage, drawing fire from both the United States and the euro zone.

“So our purpose with this thinking process is that we want to kick-start it, without drawing a conclusion from the start, and without being quite certain that we will be somewhere before the end of the year,” Lagarde said.

She indicated France would seek a discussion to widen the number of currencies in which investors can park funds, possibly through a bigger role of the International Monetary Fund’s internal accounting unit called Special Drawing Rights, or SDR.

“Today there is a clear lack of diversification which induces in itself a level of risk that is associated with the currency variation,” Lagarde said. “There are lots of alternatives.”

She said the G20 may not be the ideal forum for discussions on currency levels, but there was no other obvious grouping for such talks.

Lagarde also said France wanted to study commodity market organization, including the “massive financialization” of agricultural products markets through derivatives.

(Editing by Peter Cooney)