In an interview with weekly Die Zeit just ahead of the International Monetary Fund’s autumn meeting in Washington DC, Bundesbank executive board member Andreas Dombret called the practice used by some countries to create a competitive economic advantage “problematic.”

According to the German central bank, such currency manipulation can only be justified in exceptional situations, such as repairing dysfunctional markets. Dombret told Die Zeit, which published excerpts of the interview one day ahead of its release in print, that this would mean “taking short-term measures that serve the establishment of orderly market conditions.”

His comments pitch the Bundesbank squarely into the debate on the threat of what experts are calling “currency wars” – in which countries use exchange rates as a policy weapon. There have recently been a series of exchange rate changes by central banks in Asia and Switzerland to make their exports cheaper by keeping their currencies undervalued.

Such conflicts, in particular the simmering row between China and the US over their currency exchange rates, endanger the entire world economy, the German Institute of Economic Research (DIW) warned on Wednesday.

“A trade war between both countries could mean a bitter defeat for the economy,” DIW economist Georg Erber said in Berlin, referring to the decision by the US House of Representatives last week to put a levy Chinese products unless Beijing let the yuan appreciate against the US dollar.

This manoeuvre could even end up impacting Germany’s economic growth, he added.

The US has alleged that China was purposefully undervaluing the yuan to gain a competitive advantage for its exports, a situation that may contribute to slow economic recovery in the United States.

US politicians hope other nations will join them at the IMF meeting to pressure China to let the yuan rise, a plan Erber said he supported.

“The criticism of (China’s) currency exchange policy, particularly that from the USA, has so far shown little effect,” he said. “Countries like Germany should therefore show some solidarity, because Europe could have similar problems in the future.”

The Local/DAPD/ka