EU-DIGEST

Europe Seeks to Implement New Bretton Woods Fiat Currency System

It looks like Europe wants to re-invent the wheel and soundings are being made to introduce a "new Bretton Woods". Bretton Woods was effectively an exchange rate mechanism, were gold backed the new kid on the world block, namely the post war US dollar and all other currencies floated around the dollar in a fixed range. If a currency moved too far either way of the range then the respective Central Bank stepped in and delivered the appropriate medicine. However the US dollar was pegged to the price of gold which was fixed at an official rate of $35. All went well until one or two countries, well, mainly France decided that they wanted the gold that backed the dollar reserves they had accumulated by repatriating the dollars back to Uncle Sam. Eventually President Nixon decided in 1971 to abandon the BW agreement, triggering other attempts to set other fixed currency systems which all failed. In the end FX became a free floating system that has resisted any attempts to regulate exchange rates other than "pegs".

European Central Bank President Jean- Claude Trichet said officials reshaping the world's financial system should try to return to the "discipline" that governed markets in the decades after World War II. "Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline," Trichet said after giving a speech at the Economic Club of New York recently. "It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline."

Labels: EU, World Economy