Singapore / Bloomberg
The world economy needs something like a modern-day Plaza Accord to safeguard growth against currency market volatility, according to Singapore’s Deputy Prime Minister Tharman Shanmugaratnam.
The remarks by the Singaporean official, who is also a former finance minister, come a week before Group of 20 officials gather in Washington to discuss the state of the world economy. Similar calls ahead of a G-20 finance ministers meeting in Shanghai six weeks ago were rebuffed by top officials who said the world economy isn’t on the brink of crisis.
“We can’t keep hoping that the US Fed will postpone normalization of interest rates,” Shanmugaratnam said on Thursday in Mumbai. “But we have to have some way of preventing that eventuality from also meaning significant instability in exchange rates and capital flows at a time when Japan, Europe and China are facing very different economic conditions.”
While central banks including China, Indonesia, the euro area and Japan have pumped more stimulus into their economies since the Shanghai gathering, the moves haven’t been part of a coordinated push. Shanmugaratnam said an agreement modeled on the Plaza or Louvre accords would help boost growth for emerging markets as the world economy gets stuck in “second gear.”
“Imperfect, doesn’t guarantee stability, but it is better than leaving it untidy to the short termism of the markets and the self-reinforcing expectations of the market,” Shanmugaratnam said. Coordination on exchange rates would include intervention operations and involve “an understanding as to the zone in which we would like the major exchange rates to be,” he said.
Shanmugaratnam made the comments while sharing a stage with Indian central bank Governor Raghuram Rajan, an outspoken critic of unconventional monetary policy. In an interview on Wednesday, Rajan called the global economy “unstable” and worried that a reluctance to return to normalcy would lead to “QE infinity.”
While Rajan didn’t comment directly on Shanmugaratnam’s proposal on Thursday, he said they agreed on many issues.
“The question we have to ask ourselves is are we moving in the right direction, is there a better way, could we at least try and make sure that we don’t impose costs on each other as we try to come out of our own difficulties?” Rajan told the conference. “Certainly there’s a lot of room for discussion.”
The G-20 finance ministers ended a meeting on Feb. 27 with a commitment to use all policy tools to strengthen growth. The officials also pledged, for the first time, to consult closely on foreign exchange rates.
At the Plaza Hotel in 1985, the U.S., U.K., Japan and Germany agreed a deal to bring down the dollar through concerted selling on the currency market. They came together a year and half later in Paris with the aim of stabilizing the greenback after successfully engineering its decline.
“It has to be on the table for us to think about and not expect perfection,” Shanmugaratnam told reporters on Thursday. “But the alternative is one of constant volatility, and the emerging countries especially at the receiving end.”