Seeking a Greater IMF Role in Arbitrating Currency Disputes

October 11, 2010

Talks among officials attending the World Bank/IMF meetings in Washington failed to forge a consensus to the current multiplicity of purported currency misalignments and the role of government policies in preventing market adjustments that would promote less imbalanced current accounts.  In the absence of shared interests, nations will submit the issue to the IMF for examination leading hopefully to procedures for conflict resolution.  The IMF’s International Monetary and Financial Committee released a statement on Saturday, which included the following passage.

Mandate for international monetary stability. While the international monetary system has proved resilient, tensions and vulnerabilities remain as a result of widening global imbalances, continued volatile capital flows, exchange rate movements, and issues related to the supply and accumulation of official reserves. Given that these issues are critically important for the effective operation of the global economy and the stability of the international monetary system, we call on the Fund to deepen its work in these areas, including in-depth studies to help increase the effectiveness of policies to manage capital flows. We look forward to reviewing further analysis and proposals over the next year.

With 187 member countries, the International Monetary Fund is not a natural body for adjudicating the contentious issue of alleged currency market manipulation by various governments.  On other issues, the IMF has aroused heavy criticism for the imposing recession-producing conditions on countries in severe economic circumstances, and it is perceived with utmost suspicion by nationalistic-minded groups.  A country’s exchange rate is its single most important price.  Trusting the IMF with the responsibility of deciding disputes over that price constitutes a huge unforced waiving of sovereign power.

What would compel nations to take such a step?  The markets has been rife with talk of approaching currency wars.  A new market rupture over such perceptions would catch a world economy that has not recovered completely from the worst breakdown of the international monetary system and the severest global recession since the 1930s.  It is important for political leaders to point to a step forward rather than signal their complete inability to define, simplify and resolve the currency market tensions that have been dividing them.  Sending the problem to the IMF for study and suggestions may buy some time and fend off escalating protectionism at least until the Group of Twenty leaders meet next month in Seoul, Korea. Then again, the tactic is pretty transparent for what it is and may not preserve even temporary calm.  But the strategy beats officials leaving Washington empty-handed with no action taken on global imbalances and the role of currencies in them.  Doing such would have carried bigger risks of immediate currency market instability.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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