–Proposes New Sources of International Liquidity

PARIS (MNI) – The coordination of controls on capital movements, a
harmonization of financial regulation and the creation of “new sources
of international liquidity” could help reduce financial instability,
according to European Central Bank Governing Council member Christian
Noyer.

“The total convergence of financial systems is neither desirable
nor realistic, but we can aim to make financial interactions among
countries more harmonious,” the governor of the Bank of France argued in
an op-ed piece published Wednesday by the French business daily La
Tribune.

Global imbalances encourage instability, “and the recent tendency
of G20 members to dispute monetary or exchange rate policy does not
help,” Noyer wrote.

The central banker defended the right of each individual country —
implicitly including that of the Federal Reserve — to take the measures
necessary to insure price stability.

“When situations — and thus monetary policies — diverge, the
outcome may be foreign exchange volatility,” he conceded. “This is
difficult for countries whose currencies appreciate, but history has
shown that the alternative is worse.”

“To allow external objectives to influence monetary decisions would
lead to ‘importing’ external inflation and renouncing the benefits of 20
years of price stability,” he warned.

Noyer proposed three approaches to help create “a more efficient
and stable international financial architecture.”

While capital controls can allow countries to reduce financial
tensions, they can also shift the pressure onto other countries or to
other assets if not coordinated at the global level, thereby
exacerbating rather than reducing volatility, he said.

“A predictable framework defining the circumstances, modalities and
conditions of application of these controls would eliminate such
undesirable effects,” Noyer argued.

In order to dampen the accumulation of foreign exchange reserves,
notably in emerging economies, Noyer proposed the creation of “new
sources of international liquidity, to which countries could turn in the
case of a systemic crisis. The search for ‘financial safety nets’ is a
priority issue for the G20.”

To reduce the instability resulting from divergent financial
regulation, Noyer proposed a harmonization at the international level,
noting the “important progress” under way via the Basel Committee and
the Financial Stability Forum.

–Paris newsroom +331 4271 5540; Email stephen@marketnews.com

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