Intervention in markets to stop
Sunday 10 July 1994
The accord, reached at a meeting of G7 finance ministers at the world economic summit, has the blessing of the G7 leaders. Ministers believe that intervening on the foreign exchanges is worthwhile only when exaggerated movements occur in thin currency trading, or on rare occasions to accompany a big change in economic policy.
Finance ministers and central bankers have grown increasingly disillusioned with attempts to manage currencies through intervention, ever since the collapse of the European Exchange Rate Mechanism last August, and sterling's forced departure the year before. On Friday, President Clinton declared that intervention was usually unsuccessful. Of the two attempts to defend the dollar earlier this year, the second was an outright failure.
At a recent private meeting hosted by the Bank of England, central bankers (who did not attend the summit) displayed similar antipathy towards calls for a return to currency management. So this weekend's G7 opposition to active currency management represents an evolution in policy rather than a sea change, but it also indicates that there is little likelihood of an early attempt to rebuild the ERM.
The dollar, which fell sharply on Friday, may come under renewed pressure tomorrow when markets assess the G7's decision.
Ministers do not believe that the latest plunge in the dollar is justified, though they are worried by it. They think that to emphasise their commitment to low inflation, reduced budget deficits and sustained economic growth is the best message they can send to the markets.
Leading G7 officials said there was surprising agreement among ministers on opposing a big dollar rescue package. Even the French and Japanese delegations, which usually call for currency market management, were unenthusiastic. Future intervention in the currency markets is not being ruled out altogether, but one official stated bluntly that there would be no grand currency plan established at the summit.
The summit also saw a new trade initiative by the US President run into the sand. Mr Clinton had urged his fellow summiteers to agree to an 'open market 2000' strategy, in which they would study liberalisation of trade in investments, technology, information and telecommunications. The initiative was seen as a further US bid to prise open Japanese markets, but Jacques Delors told the US President that the plan would cause 'enormous problems' in Europe, and Mr Clinton accepted the argument.
The leaders' debate on how to tackle the global jobless crisis revealed further splits. John Major and Silvio Berlusconi, the Italian Prime Minister, argued for measures to make wages more flexible. Mr Clinton and President Francois Mitterrand warned that it was no use creating jobs that further impoverished the poorest.
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