Exchange rate co-operation

Since the Bretton Woods system of fixed exchange rates collapsed in 1971, some of the most high-profile attempts at global co-ordination have involved trying to stabilise major currencies. But the mixed record of these ad hoc efforts gives reluctant countries such as China an excuse not to repeat them – suggesting that, for now, the Group of 20 leading nations will struggle to even try to match the role played by its predecessors, the G5 and G7.

After the collapse of Bretton Woods, some European countries attempted to manage their exchange rates against each other in the evocatively named “currency snake”, which hardened into a more formal system of fixed values and, eventually, the euro.

Otherwise, however, currencies swung against each other, sometimes wildly, as the economic and monetary turmoil of the 1970s combined with high and volatile oil prices to push exchange rates around.

The growing economic power of Japan, one of the first Asian export powerhouses, raised concerns in the US about unfair currency valuations.

In the Plaza and Louvre accords of 1985 and 1987, the G5 (later G7) grouping of governments agreed first to weaken the dollar then to stabilise it, hoping to reduce the US current account imbalance, particularly against Japan. But though the dollar did weaken, America’s trade deficit remained a problem. Moreover, the exercise was blamed in Japan for helping create the financial and property bubbles of the late 1980s, as monetary policy had to be loosened to offset the effects of a rising yen.

Two decades later, some are pushing for the 1980s movie to be remade with China taking the part of Japan and the G20 supplanting the G7. “Some international co-operation would be helpful in ensuring that exchange rates could play their role in rebalancing the world economy,” says Gerard Lyons, chief economist at Standard Chartered bank.

But China seems recalcitrant. Wen Jiabao, premier, made it clear that European attempts to press Beijing into letting the renminbi rise would be no more effective than US efforts. “There is a perception in China that the currency revaluations of the 1980s ended the Japanese economic miracle,” says Mark Manger, an expert on political economy at the London School of Economics, “so they are very reluctant to follow suit.”