February 6, 2010
G-7 Report Pushes for More Exchange-Rate Flexibility
Major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on U.S. spending and Asian savings, according to a report prepared for a meeting of finance chiefs from the Group of Seven.
“Countries with inflexible nominal exchange rates must permit greater flexibility in real exchange rates either through higher inflation or a nominal appreciation of their currency,” the document, drawn up by Canada’s Finance Minister said.
G-7 finance ministers and central bankers are meeting in Iqaluit, Canada, today as policy makers seek to avoid a widening of distortions such as the U.S. trade deficit and the Chinese current-account surplus, which economists blame for helping deepen the worst postwar worldwide recession.
“While global imbalances were not the primary cause of the financial crisis, there is little doubt that they were an important contributor to the recession we faced,” the G-7 document said. “For global growth to be sustainable, it must be balanced.”
The report doesn’t mention which countries are viewed as having inflexible currencies. China has attracted criticism this year from foreign governments for limiting gains in the value of its yuan since July 2008 after it strengthened 21 percent against the dollar over the previous three years.
‘Freedom to Choose’
Although nations are entitled to set their own currency policies, the “freedom to choose their exchange rate arrangements carries an obligation not to manipulate exchanges so as to gain a competitive advantage,” the document said.
Governments and central banks want to avoid a repeat of the last expansion when U.S. consumers relied on borrowing from abroad to finance their purchases, contributing to an export boom from Asia. As China and other Asian nations accumulated dollars from trade surpluses, they bought U.S. Treasury debt and depressed global yields. Lower borrowing costs helped stoke the U.S. housing and credit booms that turned to bust in 2007.
Canadian Finance Minister Jim Flaherty told reporters in Iqaluit yesterday that the issue of how some Asian economies have “relatively rigid currencies” was one that “cannot be avoided” if the world is to become more balanced.
U.S. Treasury Secretary Timothy F. Geithner said the previous day that Chinese officials realize a more flexible exchange rate is in their economy’s best interest, and he indicated such a shift is “likely.”
Asset Bubbles
China’s consumer prices rose 1.9 percent in December, the fastest pace in a year, and gross domestic product climbed 10.7 percent in the fourth quarter, fueling speculation the nation’s authorities will allow the yuan to strengthen to damp economic growth and reduce the risk of asset bubbles.
Still, yuan forwards this week fell the most since mid- December and China rejected comments from President Barack Obama that the yuan should be allowed to appreciate versus the dollar, saying the exchange rate has little effect on the U.S trade deficit.
The G-7 should lead the way in smoothing out lopsided trade flows by presenting plans to cut budget deficits, which will help reduce demand for foreign capital, and making their economies more efficient as populations age, the G-7 document said.
Fiscal Stimulus
While it’s premature to remove fiscal stimulus, governments should lay out “clear, credible and consistent” plans on how to reverse their budget shortfalls, the report said. Frameworks could include targets for reducing debt and deficits and studies to identify the impact of demographics on borrowing.
Delay in devising plans would lead markets to “begin to question our commitment to sound medium-term policy frameworks, with the result that interest rates would rise,” the report said. “This would further complicate the challenge of re- normalizing monetary policy and introduce another source of uncertainty.”
G-7 Report Pushes for More Exchange-Rate Flexibility
Major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on U.S. spending and Asian savings, according to a report prepared for a meeting of finance chiefs from the Group of Seven.
“Countries with inflexible nominal exchange rates must permit greater flexibility in real exchange rates either through higher inflation or a nominal appreciation of their currency,” the document, drawn up by Canada’s Finance Minister said.
G-7 finance ministers and central bankers are meeting in Iqaluit, Canada, today as policy makers seek to avoid a widening of distortions such as the U.S. trade deficit and the Chinese current-account surplus, which economists blame for helping deepen the worst postwar worldwide recession.
“While global imbalances were not the primary cause of the financial crisis, there is little doubt that they were an important contributor to the recession we faced,” the G-7 document said. “For global growth to be sustainable, it must be balanced.”
The report doesn’t mention which countries are viewed as having inflexible currencies. China has attracted criticism this year from foreign governments for limiting gains in the value of its yuan since July 2008 after it strengthened 21 percent against the dollar over the previous three years.
‘Freedom to Choose’
Although nations are entitled to set their own currency policies, the “freedom to choose their exchange rate arrangements carries an obligation not to manipulate exchanges so as to gain a competitive advantage,” the document said.
Governments and central banks want to avoid a repeat of the last expansion when U.S. consumers relied on borrowing from abroad to finance their purchases, contributing to an export boom from Asia. As China and other Asian nations accumulated dollars from trade surpluses, they bought U.S. Treasury debt and depressed global yields. Lower borrowing costs helped stoke the U.S. housing and credit booms that turned to bust in 2007.
Canadian Finance Minister Jim Flaherty told reporters in Iqaluit yesterday that the issue of how some Asian economies have “relatively rigid currencies” was one that “cannot be avoided” if the world is to become more balanced.
U.S. Treasury Secretary Timothy F. Geithner said the previous day that Chinese officials realize a more flexible exchange rate is in their economy’s best interest, and he indicated such a shift is “likely.”
Asset Bubbles
China’s consumer prices rose 1.9 percent in December, the fastest pace in a year, and gross domestic product climbed 10.7 percent in the fourth quarter, fueling speculation the nation’s authorities will allow the yuan to strengthen to damp economic growth and reduce the risk of asset bubbles.
Still, yuan forwards this week fell the most since mid- December and China rejected comments from President Barack Obama that the yuan should be allowed to appreciate versus the dollar, saying the exchange rate has little effect on the U.S trade deficit.
The G-7 should lead the way in smoothing out lopsided trade flows by presenting plans to cut budget deficits, which will help reduce demand for foreign capital, and making their economies more efficient as populations age, the G-7 document said.
Fiscal Stimulus
While it’s premature to remove fiscal stimulus, governments should lay out “clear, credible and consistent” plans on how to reverse their budget shortfalls, the report said. Frameworks could include targets for reducing debt and deficits and studies to identify the impact of demographics on borrowing.
Delay in devising plans would lead markets to “begin to question our commitment to sound medium-term policy frameworks, with the result that interest rates would rise,” the report said. “This would further complicate the challenge of re- normalizing monetary policy and introduce another source of uncertainty.”
AP
