`G7 must address currency stability'
Saturday 01 February 1997
Fred Bergsten, director of the US based Institute for International Economics, said that "competitive devaluation" of currencies in Europe ahead of European Monetary Union (EMU) and the real possibility of a collapse in the yen had made immediate discussion of a stability pact a necessity and he urged the Group of Seven to give consideration to the idea when they meet in Berlin next week.
However, British officials in Davos, where Mr Bergsten was speaking, downplayed the idea. Discussion of currencies would be close to the top of the agenda in Berlin, they said, but they added that consideration of target zones for currencies, supported by central bank intervention and co-ordinated national economic policies, was thought highly unlikely.
Lawrence Summers, the US Deputy Treasury Secretary, also seemed to consider the idea fanciful and dismissed Mr Bergsten's comments as "provocative, as usual".
Kosaku Inaba, chairman of the Japan Chamber of Commerce and Industry, considered the possibility of a further prolonged slide in the yen unlikely.
The yen's recent weakness was helping exporters and as a consequence the country's economic problems were beginning to ease.
He judged that it would take five or six years before the effects of the last lending bubble were fully exorcised from the Japanese economy.
Mr Bergsten argued that a currency pact should be introduced in two stages. There should be a first stage to cope with present stresses being caused by the weakness of the yen and the approach of European Monetary Union.
He believed that European countries were pursuing devaluation of their currencies as a deliberate act so as to gain competitive advantage ahead of being absorbed into European Monetary Union.
Once European Monetary Union is created, however, Mr Bergsten expected it to become a very strong currency - "the world's second currency after the dollar" - creating the need for a further currency pact between the US, Europe and Japan.
"Without target zones for these currencies, you can expect some pretty fierce trade disputes between the three blocks", he said.
"I don't hold with the view that the euro will be a weak currency ... on the contrary, because nations within it will have so much fiscal freedom, the central bank will be forced to adjust for this with a tight monetary policy. High interest rates will mean a strong euro."
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