At first sight, it is easy to dismiss such grand designs as a futile drive, in the Gaullist and dirigiste tradition, to curb the power of the dollar and shackle free markets.
But Sarkozy’s agenda may appeal to the emerging economies of China, India, Brazil and Russia, irked by the dollar’s hegemony, while offering sufficient incentive to draw in the US and Britain, despite their belief in floating exchange rates.
It also has a domestic payoff for a president hoping to leverage his international statesmanship to revive his battered popularity, and neutralise a highly popular potential rival, ahead of a tough 2012 re-election campaign.
For Washington, discussing currencies in the wider forum of the G20 rather than the inner sanctum of the Group of Seven industrialised economies – the US, Japan, Britain, France, Germany, Italy and Canada – may offer the advantage of engaging trade powerhouse China in exchange rate cooperation.
The US believes the yuan is undervalued, giving China an undue advantage in exporting to the west.
Beijing has rejected any international discussion of its foreign exchange policy to date. It even blocked an attempt by G20 leaders in June to praise in their communique its decision to allow greater flexibility in the yuan’s exchange rate.
In an August 25 speech airing his ideas, Sarkozy suggested that the proposed discussion of a new global monetary order might start with a seminar of experts in China.
Diplomats expect this to feature prominently when Chinese President Hu Jintao visits Paris.
“What is desirable and indeed necessary today is to put in place instruments to avoid excessive currency volatility, the accumulation of imbalances and the quest for ever bigger foreign exchange reserves by emerging countries which have faced sudden and massive withdrawals of international capital,” Sarkozy said.
Some French officials have talked of a possible agreement on trading ranges for currencies, along the lines of the 1985 G5 Plaza Agreement. But Sarkozy stressed in his speech he was not advocating a return to fixed exchange rates.
Economy Minister Christine Lagarde said France would use its G20 chair to discuss proposals for wider use of International Monetary Fund special drawing rights (SDRs) as a global reserve currency – an idea mooted by China’s central bank chief.
Russia too wants an alternative to the dollar’s role as a global unit of account, while India and Brazil, among others, have sought to conduct more foreign trade in national currency.
French officials believe such a discussion would be of a sufficiently long-term nature to be unthreatening to the United States, while providing political cover for China, which has two-thirds of its reserves in dollars, to inch forward in letting the yuan appreciate.
Beijing is keen to diversify its holdings and reduce its dollar dependence over time without precipitating a sharp fall in the US currency that could destabilise the international financial system and devalue its own assets.
It could also provide political cover for European countries to accept an inevitable reduction in their representation at the IMF to make room for the emerging economies, and possibly pool the eurozone’s seats at the table.
“If the French can declare at the end of their year in the chair that they have laid the foundations of a new international monetary order and advanced the reform of the IMF, it will be a success for Sarkozy,” said an expert advising Paris on its G20 presidency, who spoke on condition of anonymity.
Heavyweight challenger
It would also help Sarkozy wrest ownership of financial reform from IMF Managing Director Dominique Strauss-Kahn, a potential Socialist contender for the French presidency in 2012.
The IMF is working on new lending instruments for economies hit by crises not of their own making, such as a precautionary credit line for good performers, meant to discourage emerging economies from accumulating excessive currency reserves.
For domestic reasons, Sarkozy does not want Strauss-Kahn – a former French finance minister – to be credited as the saviour of the world economy.
There are many possible pitfalls in Sarkozy’s path.
The US may refuse to go along with any discussion of currencies in the G20. European partners such as Germany and Britain may also prove unhelpful.
China, India and Russia may decline to take greater responsibility for unwinding financial imbalances which they feel are not their fault.
Further spasms in the eurozone debt crisis and a weak economic recovery may undermine Europe’s ability to set the agenda. But that won’t stop Sarkozy trying to set a Gallic stamp on the international financial system.
