Tapescript

INTERVIEWER Professor Lambelet, I imagine that you are in favour of freely floating exchange rates, in principle

PROF LAMBELET Oh, that's much too global a question. It depends on circumstances You know if you had a world currency you'd have no exchange rates, and that presumably would be good for trade, it would mean, you know, like under the gold standard, a very stable and certain economic environment, but then you would also need to have a world central bank, and that's quite a tall order, so, you know, I think we should take a kind of pragmatic approach and say that in a world where economic policies diverge, very often, or where coordination is often an empty word, floating exchange rates are a kind of second best

INTERVIEWER So, when you say second best, best would be a world currency with a world central bank'

PROF LAMBELET That's debatable, you see, because it would not be enough to have a world central bank, because you'd also need to have some kind of world fiscal system to cushion whatever shocks may happen in parts, only in parts of the world — if it's a global shock everyone suffers alike so there's no problem A kind of managed floating system is best for Europe At one point, you know, there will have to be a jump, I mean to a common currency When that will take place I don't know, I wouldn't expect it to be very soon

INTERVIEWER But the current managed floating system doesn't seem to work too well The speculators or the market seems to be much stronger than any government or any central bank intervention.

PROF LAMBELET That's true, and sometimes the markets may overreact But again, let's be practical You know, pure floating maybe would be too unstable a system Pegged exchange rates run into severe problems with capital flows, so a kind of, you know, half and half system whereby central banks do intervene and try to calm things down, where you may have target zones, I think, that's, you know it's muddling through all right, but, you know, that's how we live

INTERVIEWER But the volatility we've had for the last 10 or 20 years in exchange rates, it wasn't predicted by the people who said that freely floating or floating exchange rates would always be more accurate than a gold standard or a pegged system

PROF LAMBELET That's certainly true. Er, there had been a precedent incidentally, you know, when Friedman, Milton Friedman made himself an advocate of floating exchange rates, that was back in 1953, there was a precedent, as I said, in the 1920s, there you had a floating and the experience was bad. I would however say that there is a learning element in that. Let me take an example. In 78, there was a very strong speculative move on the Swiss franc, and the franc increased a lot, appreciated a lot, something like 25% within three months I don't think that this is likely to happen again, because markets have I think learned a little at least not to overreact in that way But it's not a perfect system.