Group of 20 Finance Ministers have finished a two-day meeting in South Korea on the world economy, currencies and trade imbalances that will do little to provide a concrete resolution of these contentious and threatening issues.
A pleasant and impressive sounding final statement was issued but nothing definitive was agreed on, except a form of words that will allow the US, Japan, China, Germany and many emerging economies to return home claiming ‘progress’.
The meeting was held ahead of the G-20 leaders’ summit in South Korea next month.
The G20 agreed to shun competitive currency devaluations but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects.
The big surprise was the deal giving emerging nations a bigger voice in the International Monetary Fund. That will come at the expense of some developed economies, such as Holland.
The final statement contained no major policy initiative after an American proposal to limit current account imbalances to 4% of gross domestic product, a measure aimed squarely at shrinking China’s surplus.
That failed to win broad enough backing (basically because Germany and Japan were unnerved by it).
In return Germany and China attacked America’s easier monetary policy which is aimed at trying to kick-start the sluggish US economy.
The G-20 meeting was weakened from the start when the Brazilian Finance Minister Guido Mantega failed to attend even though he articulated the growing concern about the currency value question a month ago by being the first G20 minister to warn of a currency war. Several countries sent junior ministers or central bank deputies.
The Financial Times commented that "damage limitation rather than a monumental agreement on rebalancing the global economy appears the most likely outcome for the Seoul heads of government meeting in mid-November, for which this week’s ministerial gathering has been preparing.
"If the G20 was supposed to fix an uncertain and lopsided global economic recovery, it is not doing very well."
The G20 finance ministers and central bankers said in the final statement that they remain committed to creating a sustained and balanced recovery from the economic downturn.
But, in their final communiqué, they described the recovery as "fragile and uneven", with emerging economies faring better than advanced ones.
The group also directly addressed the recent upheaval in currency markets by declaring in the communiqué that they would "move towards more market determined exchange rate systems" and "refrain from competitive devaluation of currencies".
"Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates," the statement said. "These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries."
The agreement to reshape IMF governance was the big deal from the meeting and it at long lasts recognises that economic momentum is on the side of the faster growing emerging economies, led by China, Brazil, India, Turkey and the like.
The ministers agreed that two of the nine European seats on the 24-seat IMF board will be shifted to emerging economic powers. As well, 6% of the voting and financing quota of the IMF will be moved from advanced countries to emerging ones.
Dominque Strauss-Kahn, the IMF’s managing director, said outside the meeting the IMF changes still require ratification of the IMF board and would take about a year to be implemented (listen for the screams from Europe).
The American proposal for cut trade surplus, was given short shrift.
America never talked about trade deficits (such as the US, Australia and other countries). It would mean America importing less and spending more domestically, but how that could be done was not examined. One way would be to slash US government spending dramatically which would force a massive new contraction on the economy.
For countries with current-account surpluses, rebalancing the world economy means doing the opposite – relying less on exports for growth, and more on home-grown demand. That might send their currencies higher, which is already the concern of South Korea and Japan, two of the most recent currency interventionists.
The initial American idea from Treasury Secretary Timothy Geithner to other G-20 participants, said countries should reduce current-account imbalances "below a specified share of GDP over the next few years". Although Mr. Geithner didn’t name a target, Japan said the US had put a 4% limit on surpluses.
Germany’s current account is running at around 6%, but falling as the economy resumes growing more strongly.
Japan’s is 3%. Both countries say it’s unfair for them to be lumped with China (the main target of America’s plan to try and get the Yuan higher) where the surplus is currently 4.7%.
The US current account deficit is 3.2% (and growing as the economy refuses to grow faster than the rise in the surplus).
So it’s no wonder Australia’s Treasurer Wayne Swan skimmed over those difficulties in his
