By Arvind Subramanian

Getting countries with persistent current account surpluses to adjust obsessed Keynes because he was acutely aware of the limited leverage that could be exerted against such countries. Sixty years later, that problem continues to haunt the international financial system. The ongoing global crisis originated predominantly in poor national policies and regulation. But large current account surpluses, stemming in part from undervalued exchange rates, and the resulting liquidity surfeit was a facilitating factor.

Failure to address this issue by the Bretton Woods II process would be a serious abdication of responsibility by the financial system. Few issues are as central to the system or as much in need of multilateral cooperation.

Adding to the urgency of multilateral action will be US politics. If the US economy takes a downturn and the dollar continues to strengthen, a resurgence of protectionist pressures is likely. This time around, these pressures could well take the form of unilateral action against competitive currencies. It is noteworthy that President-elect Obama has actively and repeatedly supported action against “currency manipulation.” Read more