MercoPress. South Atlantic News Agency

“Global currencies and trade wars” led to Great Depression warn IMF and WB

WB and IMF chiefs Robert Zoellick and Dominique Strauss-Khan

World leaders must defuse currency tensions before they worsen to avoid repeating the mistakes of the Great Depression, the head of the World Bank President Robert Zoellick told reporters.

The spirit of global economic cooperation, first forged in 2008 during the darkest days of the financial crisis, was weakening as the recession gives way to an uneven and shaky recovery, the head of the International Monetary Fund Dominique Strauss-Kahn said.

Fears of global currency and trade wars, which were key factors in the Great Depression, have jumped to the top of the agenda at IMF and World Bank meetings this weekend, and are also expected to be a primary topic of discussion when Group of Seven finance leaders gather on Friday.

These meetings are expected to provide a forum for intense discussions about efforts to persuade China to let its currency rise and tamp down pressures for other emerging countries to control capital flows as the US dollar weakens.

“If one lets this slide into conflict, or forms of protectionism, then we run the risks of repeating the mistakes of the 1930s,” World Bank President Robert Zoellick told reporters at a briefing.

The IMF trimmed its 2011 growth forecast for advanced economies and warned the task of reducing heavy government debt burdens, while essential, would put a significant drag on those economies.

Slow growth at home leaves countries unusually reliant on exports, and this has heightened concerns they will intentionally weaken their currencies to boost trade.

Zoellick said history shows “beggar thy neighbour” policies don't work, and suggested international agencies such as the IMF and World Trade Organization could help manage currency tensions before they erupt into something more damaging.

Japan intervened to weaken the Yen last month for the first time in six years, and several emerging markets have taken steps to prevent their currencies from rising too rapidly.

IMF Managing Director Dominique Strauss-Kahn said fading global cooperation was regrettable.

“I think it's fair to say that momentum is not vanishing but decreasing and that's a real threat,” he warned at a separate news conference. “Everybody has to keep in mind this mantra that there is no domestic solution to a global crisis.”

Strauss-Kahn said he disliked the notion that a currency war was brewing because the term was “too military” but conceded “it's fair to say that many do consider their currency as a weapon and that's certainly not for the good of the global economy.”

In an interview published by Le Monde, Strauss-Kahn pointed at China's currency policy as a primary sticking point in efforts to rebalance the global economy.

”The undervaluation of the (Chinese) yuan is the source of tensions in the world economy which are in the process of becoming a threat,“ he told the newspaper. ”If we want to avoid creating the conditions for a new crisis, China will need to accelerate the appreciation process.