Tietmeyer: problems caused by lack of FX flexibility
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Foreign Exchange

Tietmeyer: problems caused by lack of FX flexibility

But the former Bundesbank head defends the creation of the euro.

Speaking at events organized recently in Europe by the Chicago Mercantile Exchange, Hans Tietmeyer, former president of Germany’s Bundesbank (Buba), suggested that central bank intervention in FX markets could only ever have a limited impact.

Tietmeyer made his comments during a series of lectures on prospects for the survival of the euro. As a preamble to the main discussion, Tietmeyer suggested that the global economy was in remarkably good shape despite high oil prices, trade imbalances and the threat of terrorism. Of these, Tietmeyer said that trade global imbalances were the biggest problem, particularly those between China and the US.

“China needs to tighten rates and needs more FX flexibility,” Tietmeyer said. “The 2% revaluation was clearly a move in the right direction, but further steps are unavoidable.” According to Tietmeyer, a sharp decline in US assets could lead to a global recession and some concentrated action might now be necessary. The US has to address its fiscal deficit and China has to move further towards FX flexibility.

He raised the possibility of a new Plaza agreement between China and the US. The original Plaza agreement in September 1985 involved the G5 of the US, Japan, Germany, France and the UK embarking on a common policy to drive the dollar’s value lower.

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