UPDATE 4-ECB’s Stark: Currency race to devalue would be fatal

* ECB’s Stark says world must coordinate better on FX -paper

* ECB’s Gonzalez-Paramo: FX instability bad in itself

* Stark says yuan likely to appreciate in value

* Says Greece making good progress, reaffirms exit plans

(Adds comments from Stark speech)

FRANKFURT, Oct 15 (BestGrowthStock) – Countries must avoid a “fatal”
race to devalue and instead coordinate better to smooth out
currency swings, European Central Bank Executive Board member
Juergen Stark was reported on Friday as saying.

Fellow ECB policymaker Jose Manuel Gonzalez-Paramo said
instability in foreign exchange market (Read more about international currency trading. )s was bad in itself but
denied major economies were embroiled in a currency war.

Currency tensions have escalated in recent weeks in the
run-up to meetings of the Group of 20 leading nations in South
Korea, with countries at odds over what exchange rates are
appropriate for fostering balanced growth. [ID:nTOE69E02T]

Both Gonzalez-Paramo and Stark said China, which is
resisting pressure from the United States and other developed
nations to allow its yuan to revalue faster, needed to introduce
more flexibility, and Stark was confident this would occur.

“There are good reasons to assume that in future there will
be a further appreciation of the Chinese currency,” Stark said
in an interview with German daily Handelsblatt.

It would be “fatal” if countries embarked on a race to
devalue, “which in the end will bring about protectionism ..
Protectionism in the 1930s is what led to the global economic
crisis,” Stark added.

Speaking in an interview on Spanish state television,
Gonzalez-Paramo said he considered the notion of a currency war
“an unfortunate one because there isn’t one.

“… There is a permanent dialogue among the authorities in
the main countries in the world, both emerging and developed.”

A German government spokesman said foreign exchange rates
would be on the agenda at a summit between Germany, France and
Russia next week. [ID:nBAT005708]

Stark appealed for global governments to adopt euro
zone-style coordination of deficit levels.

While economic policy should still be managed by individual
countries, “we should agree globally on principles for budget
policy in the medium term, like we do in Europe,” he told the
paper.

DANGERS SEEN

Stark said a reduction in currency volatility and
sustainable economic growth could not be achieved without better
coordination between fiscal, monetary and economic policy.

He told a congress in Stuttgart on Friday that the Greek
sovereign debt crisis showed a clear need for a “quantum leap”
in EU oversight, even if investor appetite for the country’s
bonds has improved of late.

“From today’s point of view, Greece is making good progress.
Now what is needed is a deep breath,” he said, in an appeal for
markets to be patient. [ID:nFLAFLE6CL]

While euro zone governments cannot join the devaluation
race, precarious levels of state debt in parts of the single
currency area and dependence on foreign investors to fund
ballooning budget deficits led to a sharp depreciation in the
value of the euro.

Stark said the ECB would maintain its EU sovereign bond
purchasing programme for as long as needed and withdraw its
unconventional monetary policy measures when appropriate — a
departure from fellow hawk and ECB heavyweight Axel Weber, who
said this week the central bank’s bond buying programme should
be scrapped.

“The programme is temporary in nature,” Stark said.

Stark called interest rates appropriate for the medium term
since the ECB saw no risks for either inflation or deflation on
the horizon.

But holding rates at a very low level for too long presented
dangers to a functioning money market and risked delaying the
necessary deleveraging of public and private sector debt.

“The ECB will stick to its policy of gradually and
cautiously withdrawing its unconventional measures as
appropriate. In no way will the remaining measures be retained
longer than is necessary to guarantee stable prices in the euro
zone,” Stark said.

Bank of France chief Christian Noyer said low rates had
helped restart the economy after the financial crisis but they
could not stay at the current level forever. [ID:nWEA2515]

(Reporting by Edward Taylor and Marc Jones, additional
reporting by Elisabeth O’Leary and Nigel Davies in Madrid and
Christiaan Hetzner in Frankfurt, editing by Mike Peacock, John
Stonestreet)

UPDATE 4-ECB’s Stark: Currency race to devalue would be fatal