PARIS--President Nicolas Sarkozy has set an ambitious agenda of creating a new international monetary system and taming commodity speculation for France's presidency of the G20 global economic leadership forum from November.
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 United States 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 United States, Japan, Britain, France, Germany, Italy and Canada--may offer the advantage of engaging trade powerhouse China in exchange rate cooperation. The United States 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 Aug. 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 later this month.
"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 U.S. 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 euro zone'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.