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The G20 Montreal Ministerial Meeting:
A Report on Exchange Rate Management

Prepared by Gina Stephens
G8 Research Group
Montreal, October 25, 2000

In the area of exchange rate management, there has been both a general discussion of exchange rates and exchange rate policy in the run-up to the G20 meeting of finance ministers and central bank governors in Montreal on October 24-25, 2000, as well as a general furor over the declining Euro.

Prior to the G20 meeting, there seemed to be an emerging consensus on prudent exchange rate policy, with the conclusion that exchange rate regimes that lie between fixed and flexible are the most vulnerable and prone to crisis. At Montreal, the G20 acknowledged that choosing a fixed exchange rate reduces a country's ability to conduct an independent monetary policy, but stated that fixed exchange rates insulate developing economies from the vagaries of currency fluctuations. They also noted, however, that a completely flexible exchange rate system is prone to volatility and may not be ideal for some emerging market economies.

The final G20 communiqué featured an annex that outlined and restated the loose consensus in this area. It emphasized (in an echo of American policy sentiments) the necessity of "appropriate macroeconomic policies and ... sound financial institutions" to support any exchange rate policy (whether fixed or free floating). Previously there seemed to be an emphasis on choosing either end of the policy spectrum instead of an intermediately flexible currency regime, but the final communiqué notes that any regime can be viable. There is, however, an explicit warning for countries to "avoid defending an exchange rate not backed by strong, credible, and consistent supporting arrangements and domestic policies." The communiqué also highlights the role of the International Monetary Fund in offering proper advice and support to countries with emerging market economies.

The conclusions in the communiqué are in many ways influenced by the debate surrounding the weakening Euro - a topic that many finance ministers and central bank governors avoided mentioning explicitly. The fate of the Euro has been an ongoing difficulty that the G7 tried to tackle through intervention in September. This intervention has not stemmed the continuing fall of the Euro, and the European contingent of the G20 have lobbied for a second intervention and a strong and favourable statement here at the Montreal G20 meeting to encourage investor confidence. The Mexican central bank governor Guillermo Ortiz-Martinez also noted in a press conference that a continued slide of the Euro may distort trade patterns between Europe and North America, and is thus a serious issue. The Americans, however, are adamantly against further intervention. Treasury secretary Lawrence Summers has stated that the United States is determined to maintain a strong dollar and that the long-term health of the Euro will depend greatly on prudent structural policies that will stimulate growth.

When questioned regarding discussions on the Euro during the G20 meeting, Canadian finance minister Paul Martin prevaricated, stating that there was no official talk on the subject but that he could not verify the content of corridor discussions between delegates.

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