EIJS-GISPRI-IIMA Symposium titled "The New Global Financial Challenge  :
Euro, Yen and Dollar" was held with Hon. Helmut Schmidt, former Chancellor of Federal Republic of Germany, as the guest of honor on October 13, 1999, under the co-sponsorship with the Stockholm School of Economics, the European Institute of Japanese Studies, and Institute for International Monetary Affairs.

Chaired by Mr. Toyoo Gyoten, the symposium had the keynote lecture by Mr. Schmidt, as a main feature, and active discussion among panelists including Mr. Kenneth Courtis and other distinguished guests from overseas.  About 120 people attended the symposium as the participants and observers, including the officials of Ministry of International Trade and Industry, and of Economic Planning Agency, as well as embassy representative and many other experts and guests from major press, private entities, think-tanks, etc.

Summarizing the symposium, Mr. Shinji Fukukawa, Senior Advisor of GISPRI, concluded that a knowledge intensive nation filled with wisdom would be the one to take on the global management as a leader of the 21st century.  With this, the symposium was completed with an outstanding success.

[Keynote Lecture by Dr. Helmut Schmidt]

    Thank you very much for your kind, although all too flattering words of introduction.

    Well ladies and gentlemen, because there's going to be a panel discussion afterwards which might go into some specifics of the subject, let me try to in the first instance sketch out the global political background for our subject of today, the background that I do see forthcoming during the first quarter of the next century.

    Secondly I might add some remarks on the present day situation, of the three home countries or home economies of US dollars, Euro and Yen, and only in the third place I will touch upon the present day situation of the globalized financial markets.

    As we look forward into the next century, the most important aspect is the continuation of the global population explosion. This explosion started shortly after World War II, at the beginning of our century 99 years ago there were 1.6 billion human beings on this globe. Today we are six billion and by the middle of the next century, we will reach 9 billion inhabitants of this planet. This continuing explosion is in the main happening in Asia, although not in Japan.

    Secondly, in the Middle East, in Africa, and in Latin America. Not in Europe and only to a very small degree in Northern America. Not in Europe, not in Russia, not in Japan, but in the rest of the world. In 50 years time China and also India, both of them will grow, will have grown to something around 15 hundred million people each. Each of these two Asian countries will number almost as many people as the whole globe did host at the beginning of our century.

     One of the consequences is that almost all politicians in East Asia and Southeast Asia already today regard China as a world power. And in my view China will be a world power, India may follow, and possibly also Brazil, possibly later on even countries like Nigeria and Indonesia. Of course the United States will remain to be a superpower. I need not give the obvious reasons for that, but also Russia, despite all her enormous political and economic weaknesses, which may last for one or two generations, despite of that, also Russia will remain to be a world power because of its enormous territory, because of the enormous riches of its minerals, not just oil and natural gas that haven't been explored as yet, but to speak of being exploited, and because of its possession of a vast number of strategic and tactical nuclear weapons. Still many more than ten thousand nuclear weapons in the hands of Russia.

    I also do foresee that Japan will remain to be an economic and financial world power, over the first decades of the 21st  century, particularly because I do foresee Japan to remain to be the world's greatest net exporter of capital.

    Due to the ingrained instinct of the Japanese nation to save and due to its capacity for capital formation. The European Union right now consists of fifteen nations, some additional member states will join in the oncoming decades. The European Union today does create a little more than 20% of the global domestic product, and about 15% of the world's exports. These figures equal the respective figures for the United States of America, roughly speaking. By comparison, the present figures for Japan are about 7 or 8% of the world's domestic product, and around 6% of the world's exports. All the other nations on this globe presently are dwarfed by these figures for the EU, for the US and for Japan. These three countries really are the great global players.

    But then the population explosion plus the foreseeable continuation of technological globalization and the technological globalization in the long run is much more important than the financial globalization.

   Plus the technological globalization will change the present day statistical picture over the next two or three decades quite considerably. Within three decades or so the size of the Chinese GNP, I would think, also the size of Chinese exports may in three decades or so very well equal Japanese figures of that time. And only within four decades or so, will China overtake the GNP of the United States and the European Union. But of course I'm talking of the aggregate size of the future Chinese economy. Per capita, the Chinese will still remain a developing country even after thirty years time. Think of Szechwan or the hinterland provinces. To cut a long story short, if, and it's a big if, free trade prevails, if the globalization of technology does prevail which I think it will, then the growth of population in China and India, of Brazil and many other countries, is going to change the picture of the world. Not only new markets will appear, where there will be additional demand for Japanese or Western technology and for Japanese or Western manufactured products, financial services, but also now competitors will arise. And the new competitors will offer cheaper products due to lower wages and due to lower social benefits. And therefore it will become decisive for America, for Japan, and also for Europe whether or not we can enable ourselves to maintain an edge in scientific and technological global market. If we cannot maintain an edge then we will at first relatively speaking and then in absolute terms lose some of our present day standard of living. Altogether within the last two decades, into the next century, the political power constellation will turn into a mighty polar structure, not just one superpower but also China, also Russia, plus Japan as a financial and economic world power, and possibly also the EU, possibly, as a world power.

    The integration of sovereign European nations into one economic union started fifty years ago, when under the spiritual guidance of a great Frenchman, Jean Monet, the so-called community for coal and steel was created at that time just six countries, France, Germany , Italy, the Netherlands, Belgium and Luxembourg. Since then we have taken one step after the other, and have enlarged the community to nowadays 15 and a dozen or so of additional states are queuing up for becoming members as well. It's a unique undertaking because never ever in the history of mankind have sovereign nations voluntarily cast their lot into one common basket. We have seen the creation of super-states or of empires by military force in every century, in every millennium. But never ever have sovereign nations voluntarily joined their fate and tried to transform nation states into members of a greater union. It's a grandiose undertaking and of course it does meet with enormous difficulties, also psychological difficulties, and therefore it does take time. It can only be accomplished piecemealwise, once step after the other, and every step quite naturally runs into opposition within every of the 15 nations. It also runs into opposition in the oncoming new member states.

    The latest step so far has been the creation of the common currency called Euro. By the way, we have been planning for that over twenty years. We did take the first steps in 1978 and in 79, twenty years. We were looking into the future at that time because the Bretton Woods system of fixed but adjustable parities had been done away with and we were foreseeing turmoil in the markets for currency and the financial markets altogether and thought it was necessary for us Europeans to create one currency but it took twenty years to bring that concept into reality. In the beginning we were very careful not trumpeting to the world that we are going to do that. We created a so-called European monetary system, and the ECU twenty years ago. It was very difficult to convince the Scandinavians or the British that this kind of thing was the right thing to do. Right now only eleven member states of the fifteen member states of the EU are participating in this common currency. But these eleven really have abandoned their monetary sovereignty and instead created one joint central bank system in order to independently from political influences manage the joint currency.

    Although the Euro is an important and a major step, it is by far not the last step in the European integrative process. And it does not in itself make the European Union into a future world power. We do still lack for instance a joint foreign and security policy. And we do lack the institutions, which you would need for carrying out a joint policy vis a vis the rest of the world.

    Therefore it is, difficult to foresee whether or not the EU will become a world power and if so, when will it become a world power but certainly, will it be an economic power of sorts.

    Now whether we are going to three or four or five world powers in twenty or thirty years time anyway, the expected global changes that I've sketched out will pose new questions of global importance. Let me just give you six or seven examples for the new questions.

    For instance, how can mankind limit the damages to the atmosphere and to the waters of the oceans, the damages to our natural global habitat altogether, all these damages that are bound to happen due to the continuation both of the population explosion and the progressing industrialization of nowadays and then nine billion human beings. Or the other question, who has to make the sacrifices? Who will take the ultimate decision on sacrifices? Or the other question, does the world's population need a globally coordinated energy policy? Or the more important question, can we stop the population explosion? How do we do this? Who will do it? And at what political costs?

    And if the population explosion could not be dampened, and if therefore dozens of local and regional wars are to happen, in Asia, in Africa, maybe also in Latin America, just to give you an example, within the decade of the nineties, our decade the world has seen twenty-four or maybe twenty-six rather bloody local and regional wars and so-called civil wars. Rwanda, Burundi alone cost about 900 thousand lives.

    And this kind of thing will go on due to overpopulation in the future. And then in which cases do other powers have the task, moral or political necessity to step in to intervene in order to stop murder, in order to stop expulsion, and who decides? Last time, the decision was taken outside the Security Council or the United Nations.

    On the other hand, the United Nations are the only world organization that we do have. Must we not strengthen the United Nations? Should we allow it to be weakened further, as it has been in the case of the Milosevic or Kosovo?

    Or will we choose to depend on cooperative world governance by an oligopoly of four or five world powers, and who will then impose their decisions on the rest of two hundred nations? And the last illustrative example of the tasks, which the new century will be imposing onto ourselves, how can we prevent a new cold war?

    This time between China and the United States of America and possibly the allies of the USA. How can we prevent a clash between Western and Islamic civilization? In ten years time there will be more Muslims living on this globe than so-called Christians. Now let me leave all these questions open, the answer to them anyway will heavily bear upon our economic and also our political future.

    My second chapter is on the present day situation of the home countries of the three major currencies of today. Let me take the US first. The Americans can indeed be proud of their long period of growth, and of very very low unemployment. They're at full employment practically speaking. They can also legitimately praise the Reagan deregulations and certainly both the Europeans and the Japanese have to learn something from those deregulations.

    Not only the Japanese. Also most of the Europeans, certainly my own country. But then there are at least two major psychological differences between the average American and the average Japanese or European. Both these difference have their origins in the genes of those daring people who two hundred years, three hundred years ago did have the guts to alleviate their misery in Ireland or in Russia or in Germany, other places of Europe, having nothing in their hands when they arrived in America except the self-confidence that they would make it by their own effort.

    It was an elite that has emigrated from Europe to North America, and they have created children and grandchildren, who inherited the genes of this elite. From that tradition stems the relatively high horizontal mobility in the United States, also in Canada. Also stems the relatively little demand for public welfare institutions.

    Most Europeans and also Japanese are quite unlikely ever to move thousands of miles in order to find a new job. Very unlikely. You have to come from a developing country in order to undertake such a move over thousands of miles. You have to come out of Yugoslavia, but certainly not people in Austria or in Japan or in France will ever get on the move. And certainly will the Europeans not give up our welfare state, which in our view was so far the last great cultural achievement in Europe.

    Of course, Europeans will have to admit that we have overdone the welfare state and it does need some repair. Now as regards the job creation in America, there seems to be three possible off-cycles in the future.

    Number one, the stock-market bubble may burst. If we are lucky, it goes down stepwise. No stock-market bubble ever has lasted forever.

    Number two, the stock-market in the main is being financed by corporations on the one side, and by flight capital from all over the world. From Asia, from Russia, from Latin America and capital imports from Japan, also partially from Europe. The net capital import into the United States annually is in the order of 300 billion dollars, every year. Or in other words, the international indebtedness of the US economy is growing vastly, very quickly. For the time being, possibly prolonged by the war against Serbia, there is no need to fear the necessity to transfer dividends and interests or even to transfer back capital from the US to the lender countries.

    But one has to know that no other country in the world can imitate that scheme, which is one of the major factors in the long-lasting boom in the USA. No other country in the world could imitate that scheme. But then, of course, it needs to be noted that the private household savings rate in the United States is standing at zero, actually below zero. They are dissaving, desaving. I don't know whether there is such an English word. And also, one has to note that they have created a new underclass of thirty or forty million working poor, which is unthinkable to do in this country or in Europe. So, not all the lessons which the Americans try to sell you and sell us and sell the Russians and other people are really worthwhile to be taken seriously in our situations.

    Now as in regard of Europe, at least two things do the Europeans have to learn from America. One is deregulation. And secondly the much more effective system of colleges of universities, of private elite universities, plus the enormous effort at scientific research. They are just the masters in these fields.

    On the other hand, you will not forget and I certainly will not forget that in the end of the 1970s, take for instance the Tokyo Summit of the G7 in 78, it was the Americans who urged the Japanese and the Germans to play the role of the so-called locomotive for the world's economy at large. I would like you to remember this in order to understand that also American trees are not growing into the sky. There are weaknesses as well, to come also in the future, not only in the past. In the 1980s then, Japan became the scapegoat for many American concerns. You were responsible for their trade deficit, in their view. They made you responsible. Today the Americans feel rather happy, although their trade balance still is in deep deficit, but the question in my view also remains whether or not Washington, let us say toward the end of the next decade, still will teach the world how to create jobs.

    Now on Europe still the most pressing economic social and political problem is the high unemployment. Only the Dutch and the Danes have reached a remarkable successful for. And their success is not in the main due to tax policies or budgetary or monetary policies, in the main is it due to a bundle of measure and agreements relating to the labor market on the basis of good cooperation between unions and enterprises and their federations and the governments. The rest of West Europeans may learn from these examples.

    Europeans have to learn a number of things, the number one requirement is cautious but effective deregulation of the labor market.

    Number two requirement, if you want to create new jobs, is deregulation in almost any other field where entrepreneurs and corporations are being strangled by laws and by the judiciary.

    Number three requirement is a gradual reorientation of state budgets. A gradual decrease of items that have consumptive effects, an increase of those items that do have long-term effects like investment in infrastructure and in the educational system.

    And this latter word leads me to the last most important requirement, namely to instigate a Europe wide expansion of the efforts in basic scientific research, also in application-oriented research and development. This in my view is the most important requirement in the long run. And I guess it's also true for Japan.

    Let me come to Japan. Most of the recipes which I have enumerated in the case of Western Europe may not really fit for Japan. The Japanese governments, one after the other have tried out massive deficit spending, massive expansion of money supply following Keynes, but it hasn't really worked as yet. And why hasn't it? Because the reasons for the lack of economic demand in Japan, the reasons for that are not so much economic but instead, they are political and, in the main, psychological. The nations seems to have lost its confidence in its banking system.

    Also has it lost its confidence in the efficiency of the bureaucracy, particularly the bureaucracy of the Ministry of Finance, and in the government altogether. Over decades the Ministry of Finance has been calling the shots, maybe together with MITI. Their political clout was used to carry out the drafts and proposals of the financial bureaucrats.

    Now that the financial bureaucrats have failed, at least three times, they let the stock market and real estate bubbles happen, they allowed the banks to finance the bubbles, and when the bubbles burst, the collateral of the banks were severely depreciated, but the Ministry of Finance closed their eyes and didn't do anything. Now the banks have to be rescued, but the bureaucracy has lost its authority, and the politicians are finding themselves on their own, for the first time in five decades.

     They can't rely anymore to the old degree on the bureaucracy. But then the politicians in this country have no great experience in this field. Unemployment, on the other hand, is still very low, if measured by European yardsticks. Of course, the Southeast Asian troubles also did play a negative role but what in my view Japan dearly needs is the recreation of confidence by the nation in its government which requires leadership and authority.

    There's little use I think in many lessons which outsiders from Europe like myself or outsiders from American hand out to the Japanese. Some of these recipes may be worthwhile to accept, but in the main, the Japanese crisis economically speaking is nothing more than a banking crisis that has  mushroomed psychologically into a crisis of confidence in general. Otherwise the economy is not in bad shape.

    My last chapter is on the present situation of the global financial markets, which in the main are being moved by the behavior of American and European and Japanese participants, from dealers thirty years old sitting on a desk where they have a number of screens and I don't know ten or twelve telephones. From these young dealers to central banks or from marketing managers to government, it's in the main the Americans, Europeans, and Japanese who move the financial markets.

    In case that we are to enjoy a rather normal development over the next couple of years, which means no stock market crash in America, which means a steady recovery in Southeast Asia, which means no large armed conflict or the threat of it, in that benevolent case, the Euro as a currency, will begin less than three to four years worldwide be regarded to be a stable currency, stable both in regard of its purchasing power at home, so-called inflation rate records closed, and also stable in regard of its exchange rates vis-・vis other currency, probably more stable in exchange rates, more stable than Deutschmark ever has been.

    In DMs exchange rates, brackets closed. Whereas the old European currencies altogether made up some twenty percent of official global currency reserves of which 20% 16 was Deutschmark, I would guess within a couple of years the share of Euro as a reserve currency will grow to about one third of all currency reserves outside Europe, to the expense of the share of the American greenback as a reserve currency. And of course quite a few private investors will do the same thing which central banks are going to do.

    In my view the role of Euro will rather soon become equal to the role of the United States dollars in international trade and invoicing. Maybe also in the international bond market, but somewhat less in all the other international financial markets. The role of Yen as a reserve currency may increase some. It could increase its role as a currency which is used in invoicing in international trade, but this will in the main depend on the behavior of Japanese exporting manufacturers. As long as you denominate your invoice in dollars, my friend Miyazawa-san may make speeches on the role of Yen, but it is the exporting manufacturers in Japan that have a much greater influence on the role of the Yen than does have the Japanese government or the central bank.

    I guess that the Yen will not so soon become a major currency in the short-term capital markets, nor the long-term capital markets of the world due to the loss of confidence in the private banking system of this country. But this will not very likely affect the international confidence in the Yen. Rather the contrary. As long as the Japanese current account remains in considerable surplus,  as long will Yen tend to be valued by the markets. Even if one doesn't receive much interest from Yen.

    As regards the United States dollars, the American with continue to disregard the exchange right of their currency. They will stick to the philosophy of benign neglect, which they invented 30 years ago when they dismantled the Bretton-Woods system. That benign neglect philosophy will to prevail, and given the comparatively lower integration of the real US economy into the global markets of goods, the Americans will stick to their philosophy-a dollar is a dollar is a dollar is a dollar. To hell with the Euro and Yen another currencies, they don't really matter in the eyes of the Americans. In the longer run, let me say over a few decades or so,  the Chinese Yuan may gain a 3rd important position as a currency used for international trade in goods. It remains on their invoicing behavior, much more than on anything else.

    And what would happen if, against my expectations, against our hopes, we indeed do get a crash in the stock market in New York. Meaning a crash also in Tokyo and Zurich, in Amsterdam and London, Hong Kong all the places. Or if we do get a crash elsewhere of global implications.

    Of course, the federal reserve of the European central bank system, and any other central bank will play their rolls as lender of last resort. But what about those growingly powerful private financial institutions, which, for instance, are based on some off-shore island?  Like the famous long-term capital management fund?

    The likelihood of a global deflationary crisis seems very small indeed, given all the experiences that central bankers have in the back of their minds. States and central banks are experienced enough and able to prevent that but a banking crisis also can have domino effects. Chain reactions. And this is quite a different thing, not under the control of the central bankers. Alan Greenspan the other day has urged governments to install international regulatory standards for capital requirements. He's not the first one who has asked that. We have been asking this at least since twenty-four months.

    And I would ask the question, international standards, capital requirements for banks only?

    What about funds?

    What about non-banks?

    Who nevertheless are engaged daily in voluminous transactions in the short-term markets, particularly in the derivative markets.

    Non-banks. Playing an enormous role. Totally apart from the public's eye, and totally apart from the eyes of supervisory agencies. Certainly do we need different capital adequacy standards for different categories of risks. Also do we need international harmonization and better cooperation between national supervisory agencies?

    But as well do we need to solve the problem of the private off-shore mailbox for financial institutions, which do escape standards, and supervision, and taxation in many cases but which move around billions every day. The world at large now in this vary field is not overly benefited by leaders.

    The IMF has lost great chunks of its former credibility and certainly pretty much become a regulatory international agency. It has lost its credibility as an advisor to crisis-ridden countries and also as a lender of so-called last resort. But also the G7 finance ministers who since the summer of 97, autumn of 97 and summer of 98, have been talking and giving interviews and speeches on all these subjects, but have done very very little to install transparency, supervision onto the short-term money markets or to regulate privately-owned and privately-managed funds which are in fact behaving like global superbanks. Not at all being supervised in the same scrupulous manner in which every little small savings bank in Europe is being supervised.

    To sum it all up, the flexibility of exchange rates between our major currencies I guess will remain in place. But the dangerously high volatility of exchange rates does stem from the unchecked, herd-like behavior of some private institutions which makes the whole system look like a lottery rather than solid banking.

    The G7 ought to put harmonized supervision in place in all the seven major economic countries. Supervision over all private financial institutions. In other words, they must restore that kind of order which had prevailed over decades until the beginning of the 1970s. Until off-shore financing became fashionable and until the derivatives market mushroomed. They didn't exist in the 60s. They came into being only after the doing away of the Bretton-Woods system.

    To cut a long story short, at the beginning of the 21st century, it's imperative to my mind, imperative for the political leaders in America, in Japan, in Europe, to regain regulatory power over dangerous private speculation.

    The group of seven in addressing these tasks would be well advised if they invited China to fully participate, because China is, as I said earlier, inevitably on its way to become a major global player, not only in the strategic realm but as well in the fields of trade and of finance and they should be given the chance to learn early what the risks and what the problems and what the chances and what the solutions are. So to sum it up, my appeal is two-fold.

    Let us deal diligently with our present day problems, and they are solvable. But in solving them, do let us always have in mind the long-term perspectives. The OECD countries did not have the long perspectives in mind at the time when the Bretton-Woods system of fixed by adjustable parities was abandoned. They just looked until the next year, and the year thereafter. They didn't undertake any adequate preparations for a very uncertain future, a future that they would never have known, also not had the world known such a situation before World War I. Floating exchange rates. Absolutely new, for governments, also for enterprises, also for banks. And the fact that the OECD countries are together at the beginning of the 70s did not look into the future then rather quickly let these two oil price shocks happen, the answer to which were not prepared for, and let happen a number of international financial crises, particularly the crisis of nations ever since. In our present day situation quick fixes from day to day may be unavoidable, but they should be taken under the aspect of their long-term consequences. It's true that John Maynard Keynes has said that in the long run we all are dead, but mind you, our children and our grandchildren will have to live when we are dead. And therefore the present generation must not leave behind a globalized financial system in turmoil. Or you might even call it a global non-system.

Thank you very much for your attention.