Our research focuses on routes towards a sustainable financial system. We aim at sustainability in three dimensions:
- In the economic dimension, the financial system should be resilient both towards exogenous shocks and endogenous variability.
- In the social dimension, it should contribute to social stability.
- In the ecological dimension, it should finance the large-scale investments needed for the sustainability transition.
The financial system has two main objectives
- Safeguarding the savings of world citizens, in particular their pension savings.
- Financing investments in the real economy.
The financial system is facing some tough challenges
- In the past decades, the financial system has progressively decoupled from the real economy and become self-referential. The following figure contrasts world trade and daily cross-border payments from 1980 to 2010:
- Financial institutions have become too-big-to-fail and too-connected-to-fail.
- The financial system has become fragile and faces the risk of break-down.
- A break-down of the financial system would endanger the savings of world citizens and the operation of the real economy with the risk of serious repercussions to the stability of societies.
- Societies face the challenge to finance the large-scale investments needed for accomplishing a sustainability transition, in particular concerning their infrastructure.
- For triggering the financial streams needed for financing a sustainability transition, societies need to define appropriate business cases.
- The architecture of the financial system allowed – or even encouraged – the build up of destabilizing macroeconomic imbalances rather than keeping them in check. The following figure shows average absolute current account imbalances as percentage of GDP:
- A multipolar world with several national reserve currencies may show chaotic dynamics analogous to the 3-body-problem of celestial mechanics.
Two proposals from China
In 2009, Zhou Xiaochiang, the governor of the Chinese central bank, made two remarkable suggestions:
- In the long run (we guess his time horizon is about 2050), he advocated the creation of an international reserve currency.
- In the short run, he suggested to build upon the International Monetary Fund (IMF) and its Special Drawing Rights (SDRs) and gradually develop the SDRs towards an international reserve currency.
A possible first step
As a possible first step, the European Investment Bank (EIB) could emitt project bonds defined in the currency unit Special Drawing Rights (SDR or, technically speaking, XDR).
- December 2012: IASS Workshop Towards a Sustainable Global Financial System.
- June 2013: IASS Working paper Sustainability, Finance, and a Proposal from China, 1st print.
- June 2013: Prof. Klaus Töpfer presented key results of our working paper at the 2nd Global Systems Science Conference, Brussels. Audience mainly academia, EU commission, central banks, NGOs.
- September 2013: Armin Haas gave invited talk Sustainability, Finance, and a Proposal from China at the conference Towards a Sustainable Financial System, Stockholm. Audience mainly academia, Swedish central bank, civil society.
- December 2013: IASS Workshop Governance for Sustainability: How to Transform the Bretton Woods Institutions?
- April 2014: EU Horizon 2020 proposal Distributed Global Financial Systems for Society (Dolfins) submitted. Consortial lead: Stefano Battiston, Professor of Banking, University of Zurich.
- April 2014: EU Horizon 2020 proposal Green Growth and Win-win Strategies for Sustainable Climate Action (Green-Win) submitted. Consortial lead: Jochen Hinkel, Research Line Leader Adaptation and Social Learning, Global Climate Forum.
- April 2014: Paper Currencies, Commodities and Keynes submitted to the scientific journal History of Political Economy.
- Currently: Paper Keynes, Zhou, and the Bancor in preparation. Target journal: Cambridge Journal of Economics.