Post written by Sean Fisher, 2016 ILF Fellow
Pictured: Conversation between People’s Bank of China Governor Zhou Xiaochuan and IMF Managing Director Christine Lagarde.
Today was far from a typical day at work. With the British vote to leave the European Union on June 24, 2016, the international monetary system has been thrust into turmoil with financial markets across the world taking heavy beatings, major currencies experiencing major volatility, and even other members of the EU debating similar referendums. As an intern at the International Monetary Fund (IMF) in Washington DC, I had a front row seat to some of the proceedings.
This also happened on the same day that the IMF was hosting their annual Michel Camdessus Central Banking Lecture honoring the IMF’s longest serving Managing Director, who served as MD from 1987 to 2000. The lecture is designed to emphasize the IMF’s commitment to working with member countries’ central banks and provide an opportunity to discuss various central banking issues. Past speakers have included Janet Yellen, Chair of the Federal Reserve Board and Mario Draghi, President of the European Central Bank. This year, the IMF invited Governor Zhou Xiaochuan from the People’s Bank of China (PBC), who is responsible for the People’s Republic of China’s monetary policy.
Before the event had even begun, I had some great conversations with staff members at the IMF, discussing issues like Scotland potentially pushing for another vote on Scottish independence, the age gap on voters in the referendum (younger voters tended to vote Remain and older voters tended to vote Leave), and the effect it could have on the US-Europe economic relationship in addition to US-UK economic relations. Having the diverse international perspective of the IMF in front of me during this time really was meaningful and affected just how deeply I think on such important issues.
The “Brexit” (British Exit) decision provided a tense atmosphere for the proceedings as the market continued to show extreme volatility with fluctuating currency values and uncertain stock markets. However, central banks like the Bank of England have stepped forward and announced their commitment to “take all necessary steps to meet its responsibilities for monetary and financial stability” while being ready to provide additional dollar and pound liquidity. The European Central Bank has echoed these sentiments and the current IMF Managing Director Christine Lagarde followed suit, issuing a statement this morning:
“We take note of the decision by the people of the United Kingdom. We urge the authorities in the U.K. and Europe to work collaboratively to ensure a smooth transition to a new economic relationship between the U.K. and the EU, including by clarifying the procedures and broad objectives that will guide the process.
“We strongly support commitments of the Bank of England and the ECB to supply liquidity to the banking system and curtail excess financial volatility. We will continue to monitor developments closely and stand ready to support our members as needed.”
Before beginning the Camdessus Lecture, both MD Lagarde and Governor Zhou took time to re-iterate these sentiments and assured attendees that the situation was being managed as best as possible.
Picture taken by Andrea Adrianos, IMF Press Officer
MD Lagarde’s introductory remarks were standard, providing some background on the Governor and his role in Chinese monetary policy. One thing that stuck out to me was an analogy portraying China as an ocean vessel as it continues to take on a larger role in the global economy. She posed China both as a massive container ship with influence across the entire system as well as a sleek speedboat, growing and modernizing at a prolific rate in recent years, all with Governor Zhou at its head. In either case, MD Lagarde pointed out that China’s economic activities will send out ripples in the global pool that is the international monetary system and affect huge amounts of people, alluding to the ripple effects seen from the Brexit decision across the globe.
Governor Zhou’s lecture covered a wide range of topics, including the role of the People’s Bank of China in the economy, how China is an emerging country and has an economy in transition, and the importance of exchange rates, among others. It was this latter topic that captured my attention given the morning’s events and the effect it has already had on global exchange rates: hearing the Governor speak on the role of exchange rates in China’s newly emerging command economy as a pricing signal as well as how it affects future export-led growth and the PBC’s development strategy going forward was intriguing and a great learning experience overall.
While I was not able to stay for the entirety of the lecture, I would describe today as reassuring. Amidst the uncertainty and fear in the international system as entities draw back from risky behavior and focus on themselves, it was rewarding to see the dedication that the IMF and various central banks across the world have in working together to best ensure global monetary and financial stability.
Some may panic as we set foot in this uncharted territory, but we must keep in mind that it could take many years for the UK to fully disengage from the EU; with Prime Minister David Cameron resigning, Parliament must hold a two-stage vote to determine his successor, which could take months. After that takes place, Cameron’s successor must activate Article 50 of the Treaty of Lisbon and carry out exit negotiations. Working out new relationships involving important issues like trade tariffs and free movement across borders could prolong negotiations even further. While it creates an uncertain and scary environment, it also gives the international system some time where things can calm down and rational thinking can take place. It will be interesting to see how this proceeds in the coming weeks as the world reviews the situation going forward.