The present chapter considers the impact of public international law in relation to the monetary conduct of States.1 It should be explained that ‘monetary conduct’ in this context refers to the manner in which a State may seek to exercise its monetary sovereignty, for example, by seeking to fix the exchange rate of its own currency by reference to the unit of account of another State or by imposing exchange controls. The rules of public international law to be discussed in this chapter will be those rules which either circumscribe or facilitate the exercise of national sovereignty in this area. In the main, the discussion will focus on relevant treaty provisions, but there will also be some reference to the rules of customary international law.
In general terms, rules of monetary conduct which arise from treaties in principle apply only as between the States which are parties thereto.2 It would therefore generally be wrong to assume that any such treaties express universally binding duties.
In some cases, it is true, treaties which have consequences for the monetary or financial conduct of States may merely repeat an obligation which is imposed by customary international law. Thus, for example, a treaty obligation to ‘accord fair and equitable treatment’ to each other’s nationals,3 and which in law is unlikely to amount to more than an obligation to act in good faith, and to refrain from abuse or arbitrariness; in other words, such treaties merely require States to comply with the general principles of international law in the specific context of their monetary legislation and activities. It is, of course, also true that the common practice of States, reflected through the terms of treaties which they have concluded, may lead to the formation of rules of customary international law which are thus binding upon all members of the international community. The point at which such a rule of customary law may come into effect as a result of a series of bilateral or multilateral treaties involves a high degree of appreciation and the difficulties in this area are by no means confined to the monetary sphere.4 In general terms, it is submitted that bilateral treaty practice in the monetary field has not reached a level at which it is possible to deduce from it any specific rules of customary international law.
It is, of course, obvious that multilateral treaties are much more likely to create or give expression to customary rules of international law. But even here, much caution is necessary. As will be seen elsewhere,5 the TFEU now contains a number of provisions on monetary matters and seeks to regulate the conduct of Member States in the economic sphere—this position applies even to those Member States which currently remain outside the eurozone. But these rules are designed to support a monetary union, which is a discrete form of monetary organization; consequently, despite the number of States which are party to it and its obvious significance within the monetary field generally, it is submitted that the TFEU cannot provide a source for newly emerging norms of customary international law in the monetary sphere.6 A lesser degree of caution is perhaps required when one considers the position of the International Monetary Fund (IMF), where the vast majority of States are members.7 Thus, if the members of the Fund grant to each other the right ‘to regulate international capital movements’,8 then it is possible to suggest that such a right is recognized by customary international law. As a result, the imposition of capital controls—even by a State which is not a member of the Fund—could not be regarded as a wrongful act within the context of customary international law.9 The point has been acknowledged by the General Counsel to the Fund, who has noted that Article VI(3) of the Fund Agreement—allowing members to impose controls on capital movements—is merely declaratory of preexisting customary international law.10
The position of the IMF Agreement may be regarded as exceptional in this context and various aspects of the agreement are considered at paragraph 33.02–33.09. Apart from that particular case, it is necessary to maintain a clear distinction between treaty law and customary international law.
The right to enforce treaty provisions dealing with monetary conduct is generally vested in the contracting parties. Thus, whether or not the nationals of a contracting State or a third State can derive rights or benefits from a treaty is a question governed by the general law.11 So the important question thrown up by the Articles of Agreement of the IMF is whether a duty laid down by the Articles exists only as between the member countries and the Fund, or also as between the member countries themselves. A review of the Articles of Agreement does not provide an unequivocal answer. It is true that the Articles provide the Fund itself with certain sanctions against the member country in default, but this does not necessarily lead to the conclusion that other member countries are deprived of the rights and remedies usually available to them following the breach of a treaty by another party.12 It may, for example, be argued that the Fund needed to have treaty-based sanctions at its disposal, for otherwise it would have had none; on the other hand, it was unnecessary to confer specific remedies on the member countries themselves, for remedies such as counter-measures were already available to them under international law.13 It may also be argued that membership of an international organization involves a mutuality of rights and obligations among the member countries, which should themselves be enforceable by the members individually.14 It should be added that the point may assume importance where, for example, a member country restricts current payments in contravention of Article VIII(2)(a) of the Fund Agreement; does the errant member thereby become liable only to such sanctions as may be imposed by the Fund, or does it also breach an obligation separately owed to all of the other members? It is suggested that the wider interpretation should be adopted, such that member countries are entitled to enforce their mutual obligations under the Agreement, should the occasion ever arise.15
All treaties establishing rules of monetary conduct pursue specific purposes which are usually defined and of which those mentioned in the first Article of the constitution of the International Monetary Fund are probably representative. They include, in particular, the promotion of international monetary cooperation, the stability of exchanges, the creation of a multilateral system of payments, the elimination of exchange restrictions, and of any disequilibrium in the international balance of payments. Such statements provide a valuable aid to the interpretation of the substantive provisions of the treaty, but they should not themselves be treated as laying down any legally binding rights and duties. It would, therefore, be wrong to derive from the very broad terms of Article 1 of the International Monetary Fund Agreement any specific legal duties which are not reflected in the express terms of the treaty.16
A similar example is provided by the TEU. The introductory provisions refer to the desire to promote (amongst other things) ‘the sustainable development of Europe based on balanced economic growth and price stability.’17 These provisions represent a statement of intention or objectives; they provide a useful backdrop to the rest of the Treaty but they are not themselves capable of creating independent rights or obligations.18 Substantive rights and duties of a legal character only become apparent as the Treaty develops its theme, for example, by imposing upon Member States a positive obligation to conduct their economic policies in accordance with guidelines developed by the Council in that area.19
Even where a treaty includes the promotion of international monetary cooperation amongst the express obligations of the contracting States,20 the precise extent of any legal obligation thereby created is very doubtful. It is necessary to reach this conclusion because, in the nature of monetary and economic matters, the ultimate objective is likely to consist of subject matter which is not readily amenable to judicial consideration. Thus, for example, the members of the IMF are placed under an obligation to ‘consult with the Fund’ in relation to that country’s exchange rate policies, and to allow the Fund to exercise ‘firm surveillance over the exchange rate policies’ of its members.21 Member countries are also placed under a duty to ‘collaborate’ both with the Fund and other members ‘in order to ensure that the policies of the member with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of monetary liquidity’.22
The duty to ‘consult’ or to ‘collaborate’ is one of uncertain legal quality and extent. Furthermore, the ultimate objective of that collaboration is understandable in general terms but wholly abstract in legal terms. The same remarks must apply to duties of ‘cooperation’ and similar obligations. Thus, where actions in the field of exchange control to be taken under the Fund Agreement conflicted with the terms of earlier international engagements, the affected parties were required to ‘consult with one another with a view to making such adjustments as may be necessary’.23 Provisions to similar effect were found in the original text of the EC Treaty. Article 105 provided that ‘Member States shall co-ordinate their economic policies’ with a view to ensuring the equilibrium of their overall balance of payments and to maintain confidence in each Member State’s currency; for that purpose they were to ‘provide for co-operation between their appropriate administrative departments and central banks’. Provisions of this kind are doubtless required to be performed in good faith,24 and this requires genuine cooperation or consultation with a view to arriving at a result; the States concerned are under an obligation to conduct themselves such that the cooperative or consultative process is designed to be a meaningful one.25
Whilst duties of consultation and collaboration are thus clothed with some legal substance, it is nevertheless necessary to conclude that there is no obligation on the parties to reach a solution by means of the cooperative or consultative process and (even if there were) the required objectives tend to be stated in a manner which would preclude any meaningful judicial examination. An obligation to cooperate with a view to achieving a particular objective does not impose an obligation to achieve that objective. The duty to negotiate is not an onerous one, and can be discharged with relative ease.26 These conclusions are no doubt entirely unsurprising, and the general points which have been made are by no means confined to treaties addressing monetary or economic issues. Whilst all will, of course, depend on the precise terms of the treaty at hand, it seems that obligations to cooperate or to consult in the monetary sphere will usually have only limited legal content. This view is only reinforced by the undoubted fact that intensive consultation between Governments in a monetary field could only act as a spur for market speculation and rapid movements of capital, both of which may have destabilizing economic consequences; the secrecy of such consultations will therefore be vital to all parties. Where such a duty of consultation exists, there is accordingly every reason for limiting both its scope and its duration. It is for this reason that the failure of the British Government to consult with the IMF prior to the 1949 devaluation of sterling is perhaps understandable, if not necessarily defensible on a strict view of the Articles of Agreement.27
Obligations of consultation and cooperation thus impose only minor constraints on a State’s freedom of action in the monetary field. It is thus necessary to conclude that treaty provisions of the type here discussed have only a very limited impact on the monetary sovereignty of the contracting States.28
A clearly defined and self-standing legal duty to maintain stable currencies does not at present exist; under current monetary conditions and bearing in mind the international character of the financial markets, it is difficult to imagine that State practice will even begin to suggest the existence of such an obligation under customary international law.
Such obligations as exist in the field of exchange rate stability tend to involve general statements of intention or duties of cooperation/consultation, which are inevitably subject to the difficulties which have just been described.29 Thus, the members of the Organisation for Economic Co-operation and Development (OECD) have merely undertaken to ‘pursue policies designed to achieve … internal and external financial stability’.30 A Member State of the European Union which remains outside the eurozone is under an obligation to ‘treat its exchange rate policy as a matter of common interest’, but this by no means affects the ‘floating’ status of the currency concerned.31 The Exchange Rate Mechanism of the European Monetary System attempted to achieve a degree of exchange rate stability, but even this formal arrangement only required currencies to be valued within permitted ‘margins of fluctuation’.32
On the other hand, one of the main purposes of the Fund was to ‘promote exchange stability, to maintain orderly exchange arrangements amongst members and to avoid competitive exchange depreciation’.33 In seeking to give effect to that objective, the original rules of the International Fund imposed very specific duties on the United Kingdom and other members that had established a par value for their currencies. Such members were under a duty to maintain the par value and they were not to change it except in accordance with the terms of the Agreement; furthermore, member States were not allowed to propose a change in the par value of their currency, unless this was required to correct a fundamental disequilibrium.34 This system broke down in 1971 and is now only of historical interest as an experiment in the international management of money, which operated reasonably successfully for about 25 years but which was unable to withstand an economic crisis caused by the abrogation of the dollar convertibility into gold.
When the Second Amendment to the Articles came into effect on 1 April 1978,35 member countries were allowed a choice of exchange rate regimes.36 They could maintain the external value of their currencies by reference to the Special Drawing Right (SDR) or the currency of another member country; they could maintain that external value by cooperative arrangements with one or more other members of the Fund,37 or they could adopt ‘other exchange arrangements of a member’s choice’ (for example, a freely floating currency). These open-textured provisions were accompanied by the members’ undertaking ‘to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates’. This obligation was explained38 by a number of additional provisions which are open to the objections noted in paragraph 22.15. Members were required to ‘endeavour’ to direct their economic and financial policies towards the objective of orderly economic growth; they were obliged to ‘seek to promote’ orderly economic conditions and monetary systems which did not tend to produce ‘erratic disruptions’; and they were required to follow exchange policies which were compatible with these very general obligations. Perhaps the most substantive obligation required member countries to ‘avoid manipulating exchange rates … or the international monetary system in order to prevent effective balance of payments adjustments or to gain an unfair competitive advantage over other members’.39 At the same time, the Fund has the duty to ‘oversee the international monetary system to ensure its effective operation’ and ‘the compliance of each member with its obligations’ just mentioned. In particular, the par value system has disappeared and the prospects of its reintroduction must be remote in the extreme.40
It is thus plain that there is at present no positive treaty or other obligation on States to ensure the international stability of currencies, nor does the creation of any such obligation appear to be at all likely.41
If there is no positive duty on States to maintain the stability of relative exchange rates, then it might instinctively be thought that the question of floating exchange rates does not arise for consideration. If a State is not under an obligation to maintain a stable rate of exchange, other States can scarcely complain if it allows its currency to float.
Broadly speaking, this conclusion would be correct. Some countries—including the United Kingdom—now allow their currencies to float freely and do not intervene in the foreign exchange markets with a view to maintaining a particular external value for the pound. The United Kingdom has not done so since 16 September 1992 (so-called ‘Black Wednesday’).
It is true that the United Kingdom owes a duty to other EU Member States to treat its exchange rate policy as a matter of ‘common interest’,42 but it is difficult to see how this obligation can have much force or substance when a country exercises its acknowledged right to allow its currency to float freely and, hence, abstains from market intervention.
As noted earlier, a monetary peg involves the fixing of the value of one currency in terms of another. The object of such an arrangement is to bring stability to the pegged unit and thus to inspire confidence in investors and others.
But the recent emergence of a dispute centred on the renminbi, the currency of the People’s Republic of China, raises a difficult problem in relation to this type of monetary structure, namely, is a country under an obligation to adjust the pegged rate under any circumstances? Or, to express matters another way, can other States object if a particular State elects to fix or ‘peg’ the value of its currency to the currency of another country? The nature of such arrangements, including the institutional and other means by which they can be achieved, will be considered at a later stage.43 In line with the overall structure of this chapter, the present discussion is concerned solely with the consistency of such arrangements with international law.44
Since 1995, China had maintained a pegged currency, such that the rate of exchange with the US dollar was maintained at CN¥8.28:US$1.00. Tensions began to surface in the second half of 2003,45 with the allegation that the exchange rate was artificially depressed in a manner which gave an unfair advantage to Chinese imports into the United States. Could it be argued that either the initial creation or the continued maintenance of the ‘peg’ was in any sense inconsistent with any international obligations of China, such that it was thereby placed under an effective obligation to terminate the peg and to allow its currency to float on the international markets or, alternatively, to re-fix the peg at a rate which would effectively allow for a more balanced level of trade between the two countries? The point does not appear to be the subject of any direct decision or precedent, and it is thus possible only to make a few comments of a general nature. The following may be noted:
(a) Subject only to the point noted in (b), there is no evident principle of customary international law which would prevent a country from establishing a ‘peg’ or fixed exchange rate by reference to another currency.46 As will be seen, a ‘peg’ usually operates by means of a requirement that all physical money in circulation should be ‘backed’ by assets in the reference currency held by the monetary authority of the pegged currency.47 If the country that issues the reference currency chooses to allow that currency to be used and traded internationally and without restriction, then it is difficult to see any ground for objection if other countries seek to peg their national units against that currency as part of a broader economic policy.48 No doubt, in the normal course of financial and diplomatic affairs, a country which proposed to establish such a peg would usually seek the consent of the country which issues the reference currency, or would at least notify it of the proposed arrangements before they were brought into effect. But there is no positive obligation to do so, given that the adoption of a peg is specifically sanctioned by the terms of the Fund Agreement.49
(b) Under international law, States are to be regarded as both independent and equal. As a result, customary international law requires States to refrain from intervention in the affairs of other States.50 Would this principle of non-intervention prohibit China (or any other country) from linking its currency to the US dollar as part of its broader economic policy?51 In other words, does the implementation of the currency peg by China constitute unwarranted intervention in the affairs of the United States? It is suggested that this question must plainly be answered in the negative. First of all, action taken by a State will only constitute ‘intervention’ for these purposes if it is ‘forcible or dictatorial, or otherwise coercive, in effect, depriving the State intervened against of control over the matter in question. Interference, pure and simple is not intervention.’52 The establishment of a currency peg for general economic objectives cannot possibly meet these criteria, for such an arrangement does not detract from the internal sovereignty of the United States. Furthermore, the establishment of the peg will only amount to unlawful intervention if it bears ‘on matters in which each State is permitted by the principle of State sovereignty, to decide freely’.53 Now it has been shown that a State enjoys sovereignty in the monetary field, but the extent of that sovereignty is necessarily limited. In particular, a State cannot by means of domestic legislation, control the price which others will pay for its currency on foreign markets, or otherwise control the use of its domestic currency outside its borders.54 It follows that China’s decision to introduce and to maintain a peg of its domestic currency to the US dollar cannot be impugned on the ground of international customary law.
(c) In the absence of any relevant principle of customary international law which would inhibit currency pegging, any legitimate objection must be derived from multilateral treaties to which both countries are party. So far as the US–China situation is concerned, this would seem to include the Agreement establishing the World Trade Organization (WTO)55 and the Articles of Agreement of the IMF.56 It is necessary to consider each of these possibilities. For immediate purposes, the questions arising from the WTO Agreement will be considered; the issues arising under the IMF Agreement are discussed at paragraphs 22.28–22.46.57