Bank of England governor Mervyn King has warned that tensions between countries over their respective exchange rates could degenerate into trade protectionism amid talk of a potential ‘currency war’.
Ahead of a meeting of G20 finance ministers and central bankers in South Korea this weekend, King told British business leaders late on Tuesday that “the need to act in the collective interest has yet to be recognised”.
“Unless it is, it will be only a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing” of economies.
“That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences — including our own.
“But, to borrow a phrase, in order to be tough on protectionism, we need also to be tough on the causes of protectionism.”
King called for a “grand bargain among the major players in the world economy”.
The world needed “a bargain that recognises the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism.
“Exchange rates will have to be part of such a bargain,” he stressed.
The United States and European Union, trying to export their way to economic health amid lacklustre domestic demand, accuse China of significantly undervaluing the yuan to boost its own exports.
China says it is being made a scapegoat for US domestic problems.
And it points out that expectations of US “quantitative easing”, a move to pump more dollars into the market, are swamping emerging markets with destabilising capital inflows as investors chase higher yields.
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