Currency wars looming, warns Mukherjee

The policies of aggressive fiscal stimulus and cheap money followed by advanced economies for extended periods, in their effort to help the financial sector's return to normalcy and to stimulate economic activity, could lead to currency wars that could ultimately undo the progress achieved so far in bringing normalcy to global financial system, finance minister Pranab Mukherjee said today.

Addressing a meeting of the finance ministers of the BRICS grouping (Brazil, Russia, India, China and South Africa), in Washington, Mukherjee said the weaknesses in major developed economies continue to be a drag on global recovery and pose risks for world economic stability.

However, he said, unusually low interest rates and two rounds of quantitative easing in the US have so far not resulted in a sustainable revival of the real economy.  On the contrary, it had added new risks, including greater volatility among major currencies and commodities, and a surge of volatile capital flows to emerging markets. 

Measures taken in the euro zone to deal with the debt crisis emanating from the peripheral economies have also not been successful in stabilising the situation and reassuring the markets.

There is also a fear that euro zone sovereign debt crisis could spread to some larger countries that are too big to be bailed out. The European banking system is also at risk on account of its exposure to peripheral sovereign bonds and cross holdings that make them vulnerable to contagion from assets not directly on their balance sheets.

Growth in Japan also remains a source of concern following the after effects of the earthquake and tsunami, he pointed out.