So, according to Brazil's Finance Minister, we are in the midst of an international currency war. Some observers worry that trade wars will now follow.

Well, I did say that exchange rate policy was going to be a major theme this year. As well as the ongoing crisis in the euro area, we have had a resumption of the contentious debate over the future of China's exchange rate.

The latter has now flared up again. China's move earlier this year to allow the RMB to appreciate has delivered change so modest that it has failed to placate an increasingly impatient Washington. The game of currency Kabuki – seen recently in the quite blatant timing of currency moves to try to head-off US political pressures – is reaching its limits. President Obama has now made very public his views on the need for a stronger RMB, and on Wednesday, the US House of Representatives voted to give the Obama Administration expanded authority to levy tariffs on nearly all Chinese imports to the US. For its part, Beijing continues to deny that the RMB is the problem (more on that in a follow-up post).

If Brazil's Guido Mantega is right, and we are now in the middle of a series of competitive devaluations, what does that mean for the world economy? The pessimistic view is that we would be in danger of re-running the destabilising, beggar-thy-neighbour policies of the 1930s. A more optimistic take is that competitive devaluations deliver a form of uncoordinated monetary easing that can support activity in the depressed developed world. That may right, but as the US-China spat highlights, any benefits would have to be set against the risk of triggering a major rise in protectionism and, as a result, a deterioration in the health of the US-China relationship more generally.

It follows that dealing with the world's exchange rate problems should be high on the agenda at the upcoming G-20 meeting in November in Korea. But finding a compromise is not going to be easy. 

Several commentators have noted that we recently passed the 25th anniversary of the Plaza Accord, and expressed a hope that the G20 could yet deliver something similar. Unfortunately, Plaza is not a particularly helpful example. For a start, there is plenty of disagreement over whether it actually worked in the way its supporters claim. Then there is the fairly common (albeit disputed) view that Plaza was bad news for Japan's economy, and that China should not repeat Tokyo's mistakes. And finally, there is a big difference between the G5 (as it was when Plaza was signed) and the G20: the former is a club of relatively like-minded rich countries, while the latter is much more diverse in terms of membership and interests.

International economic cooperation and policy coordination was problematic enough at the time of the Plaza Accord; it looks even harder now.

Photo by Flickr user amalthya, used under a Creative Commons license.