US, France call for flexible exchange rates at G20

G20 seeking monetary reform © AFP/File Karen Bleier

AFP

NANJING, China (AFP) – French President Nicolas Sarkozy and US Treasury Secretary Timothy Geithner on Thursday called for more flexible exchange rate regimes as G20 nations met on global monetary reform in China.

The pair, speaking at the start of a day of talks in the eastern city of Nanjing, also called for a widening of the basket of currencies underlying the IMF’s international reserve asset, while keeping the dollar and euro stable.

The West wants to see the yuan become part of the International Monetary Fund’s Special Drawing Rights (SDR) basket as part of its efforts to prod Beijing into opening up its tightly managed and controversial currency regime.

“It’s clear we must move towards a more flexible exchange rate system that would allow the world to absorb shocks. But this system cannot evolve without rules, coordination and oversight, or instability will prevail,” Sarkozy said.

Geithner echoed his comments, saying the gap between flexible and managed exchange rate policies — and the problems such a divide creates — was “the most important problem to solve in the international monetary system today”.

 “This asymmetry in exchange rate policies creates a lot of tension,” Geithner said, noting that it “magnifies upward pressure” in emerging markets with flexible exchange rates and “intensifies inflation risk in those emerging economies with undervalued exchange rates” — a clear reference to China.

The seminar — bringing together ministers and central bankers from the world’s leading economies, as well as a select group of academics — was organised by France, which holds the Group of 20’s rotating presidency.

French Finance Minister Christine Lagarde hailed the meeting as a “real success” and said participants had agreed on the need to expand the role of the IMF to monitor global economic imbalances.

The meeting, which took place as the global recovery faces major hurdles such as Japan’s quake-tsunami disaster and the ongoing eurozone debt woes, aimed to hone in on key ways to reform the monetary system.

China had ruled out any discussion of its exchange rate regime despite ongoing criticism that the yuan is massively undervalued, giving its exporters an unfair trade advantage, but the issue nevertheless surfaced.

Chinese Vice Premier Wang Qishan vowed Beijing would “work with the rest of the international community” to ensure the “economic order will move towards a just and equitable and win-win direction”.

Sarkozy called on the G20 to agree on a timetable for widening a basket of currencies determining the value of the SDR, which now only includes the dollar, euro, yen and pound.

“Isn’t it time to agree on a calendar for the expansion of the SDR basket to new currencies from emerging nations, such as the yuan?” Sarkozy said.

“We must support the inevitable internationalisation of the world’s major currencies,” he added.

“This of course does not mean calling into question the crucial roles of the dollar and euro, which must remain stable.”

Geithner said those countries whose currencies eventually become part of the SDR basket “should have flexible exchange rate systems”.

Nobel prize-winning economist Robert Mundell agreed, telling reporters that an expansion would enable the IMF to “help Europe more and other countries that are in financial difficulties”.

Chinese central bank governor Zhou Xiaochuan welcomed the calls but said Beijing was not in a hurry for the yuan to be added to the basket, Dow Jones Newswires reported.

European Central Bank President Jean-Claude Trichet said such a move would depend on the yuan being fully convertible and free-floating.

Including the yuan in the basket would “entail a hefty appreciation” of the unit, and China is “unlikely to be able to stomach the necessary steps”, Alistair Thornton, a Beijing-based analyst for IHS Global Insight, told AFP.

At a meeting in Paris in February, the G20 agreed to a set of indicators to measure economic imbalances between surplus exporters such as China and nations with structural deficits such as the United States.

In Nanjing, though, such imbalances “will not be at the centre of discussions,” one Western diplomat said earlier.

IMF chief Dominique Strauss-Kahn urged countries to take steps to reinforce the global monetary system, warning failure to do so would leave it “vulnerable”.

“The international monetary system we have is not broken, but it has serious holes in it — holes that get bigger and bigger as globalisation increases,” he said.

© AFP — Published at Activist Post with license