What is happening to our global financial architecture? In preparation for next month’s Group of 20 meeting, finance ministers headed by the US have suggested a new, overarching principle for trade relations. Surpluses and deficits are to be reined in as a share of national income, forcing chronic deficit nations to raise domestic savings and excessive exporters to increase domestic demand. The proposal amounts to a radical new rule for global development. It also entails unprecedented G20 authority. Its apparent rejection underscores the challenge of new, multilateral bodies imposing governance on long-standing convention.

Such boldness is needed only because the International Monetary Fund has failed to meet its existing responsibilities. Article 4 explicitly requires the IMF to conduct “firm surveillance” and adopt “specific principles” for foreign exchange management. These mandates have not been fulfilled. The absence of clear principles for intervention and binding rules for their enforcement is forcing the G20 to fill the gap.

There is a better alternative. Foreign exchange intervention can only be successful at levels consistent with those that promote sustainable economic growth in the long term. These values are known and knowable. Accumulating foreign reserves above levels needed for prudential purposes at values inconsistent with promoting equilibrium is destabilising – for the global economy and the country concerned. It must be discouraged.