The finance ministers and central bank governors of the world's major industrial nations agreed today that the use of floating exchange rates in the international monetary system "remains valid and requires no major institutional change."
The Group of Ten ministers agreed that the floating-rate system had "shown weaknesses" that required shoring up, but gave near-total endorsement to a 60-page report on the international monetary system by a committee of deputies headed by Italian central bank Director General Laberto Dini.
The report, two years in the making, was a by-product of French President Francois Mitterrand's call for a Bretton Woods-style conference that would turn the world toward a fixed-rate regime once again.
But the exercise instead produced an endorsement of the existing flexible-rate system. The French did not dissent, although they believe that dramatic reforms of the system will be necessary eventually.
According to the report, more strict surveillance by the International Monetary Fund can encourage greater stability of exchange rates because it will encourage countries to bring their basic economic policies closer together. But the IMF, acting as a monitor, can't do the job alone, the report suggests.
Dini said in an interview that "a key theme is that no monetary system can assure stability unless it is backed by proper policies. And for that, you need political will."
The Dini committee said that the primary weakness of the floating-rate system is its tendency to generate short-term volatility of exchange rates that can discourage trade and investment.
For example, in his speech today to the assembled finance ministers and central bank governors, Treasury Secretary James A. Baker III took specific note of the "painful" impact on the U.S. manufacturing sector of the high exchange rate of the U.S. dollar.
Baker is scheduled to discuss finance and trade issues Saturday morning with Japanese Prime Minister Yasuhiro Nakasone and Finance Minister Nobuhiro Takeshita, who chaired today's G-10 meeting.
The unanimous view expressed in a ministerial communique today was that greater stability in exchange and financial markets is highly desirable, but is not achievable if the economic policies of major nations diverge.
As expected, the ministers voted to take a modest step toward greater exchange-rate stability -- not through massive intervention or capital controls, but through increased multilateral surveillance by the IMF of the economic policies of the major nations.
But Baker said the deputies had not gone far enough on surveillance. He reported that the United States had favored giving greater publicity to potential criticism of its own and other countries' policies by the IMF managing director, Jacques de Larosiere.
The Dini report sets out recommendations covering two different kinds of surveillance. First, it said that the IMF should provide "more candid" assessments of the policies of all nations, rich and poor -- with a better system for following up on how nations respond to the advice.
Then, for "multilateral surveillance" of the G-10 countries and how their domestic policies affect international exchange rates, the report set out a complicated procedure to bring peer pressure on those that may be damaging the economic health of others.
The main sanction proposed is publication of a special chapter in the IMF's annual World Economic Outlook explaining the repercussions of national policy decisions. For example, the chapter might review the global impact of the U.S. budget deficit or the Japanese current account surplus. The G-10 nations also would debate among themselves the material in the special chapter.
But Baker complained that the Dini report stopped short of endorsing the concept of increased publicity. The United States had urged the release of an "abbreviated version" of de Larosiere's advice to individual member countries.
The French were disappointed in the rejection by a majority of the ministers of their proposal to move toward "target zones," a form of greater fixity of exchange rates. The communique said that this was not "practical" in present circumstances.
"We are realistic, we take every step we can get," French Finance Minister Pierre Beregovoy said in an interview. "This decision is not permanent."
The French also took a restrained view of the report's rejection of a new issue of special drawing rights. The report reflected the view of the United States and others that the global economy does not suffer from a shortage of liquidity. Moreover, it revealed that the IMF board intends to review "the future role of the SDR in the system."
Beregovoy pointed out that the matter will come up again in Seoul in October, when Third World nations that seek a new SDR issue will be present.
Baker said that the United States would make some innovative proposals at the annual meeting of the IMF and World Bank in Soeul for a better meshing of IMF and bank operations. The Dini report also implied that the bank was not playing as important a role as the major countries were expecting of it.
Treasury officials in Tokyo said that one thing Baker has in mind is to return the IMF to the original concept of it as a lender for short-term balance-of-payments purposes, and to encourage the World Bank to take on more of the task of "long-term structural adjustment that may be more appropriate to it."