So, it's likely same old, same old. Continue as you were--America certainly appears to have no intention of laying up on "quantitative easing," while chronic surplus-running countries take it as a reason not to take US overtures seriously. Market News International offers a thoughtful analysis on what happened at the gathering. Recession in the heartland of subprime has actually reduced the US external deficit to below 4%, making China and Germany the main parties in American crosshairs with such a figure. Unsurprisingly, neither are very happy about it:
As expected, the G20's final communique did pledge to move towards market-determined exchange rates, to avoid competitive devaluations, and to use "the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels." But the group failed to agree on any concrete plan for reducing global imbalances and prevent growing unilateralism from harming the world economic recovery.There are interesting details in the proposal like natural resource exporters Russia and Saudi Arabia being given more leeway in running external surpluses. The absence of Brazilian finance bigwigs is noteworthy, too. As ever, though, we seem to return to the G-2:
A U.S. proposal to set numerical limits on current account balances was shunted to the International Monetary Fund for further study, leaving the G20 delegates saying that "indicative guidelines to be agreed" would provide a framework for addressing global imbalances at some indeterminate point in the future.
The woolly nature of the communique, and the at times confrontational briefings held by G20 delegates following its publication, left the impression that the world's major advanced and emerging market economies failed to make any real progress in arriving at an agreement that will meaningfully tackle imbalances.
Financial Stability Board Chairman Mario Draghi said that U.S. Treasury Secretary Timothy Geithner's proposal, which would seek to limit current account surpluses and deficits to 4% of GDP by 2015, is "on the table" and deserves "close attention, consideration and discussion." Instead of that proposal, the final communique saw the G20 asking the IMF to study the causes of large imbalances and the range of policies needed to correct them.
In any case, the "indicative guidelines" won't be ready by the time G20 leaders meet for the summit meeting in Seoul in November, Japanese Finance Minister Yoshihiko Noda said, without indicating when they would be ready. While it all might have sounded like passing of the buck, most officials here have not hesitated to talk up the level of cooperation and agreement reached during these recent days of talks.
But German Economic Minister Rainer Bruederle, in the best blunt German fashion, provided some corrective to the very public cordiality on display here when he lashed out Saturday at both the proposed fresh round of quantitative easing by the U.S. Federal Reserve and Geithner imbalance proposal.
While Fed Chairman Ben Bernanke has said that such a move would be motivated by fears of a fresh U.S. recession, "I have tried to make clear in my contribution that I think this is the wrong way," Bruederle told reporters.
Moreover, the Fed's policy belied the U.S. charge that some emerging countries were manipulating their currencies, he argued. "An excessive increase in (the quantity of) money to me represents indirect manipulation" of the exchange rate toward a weaker dollar, he charged, arguing that major emerging countries shared this view. "This was also the criticism of the BRIC states (Brazil, Russia, India and China), he continued. "They say that (the United States is) also manipulating exchange rates because (it is) pumping so much liquidity (into the markets)."
Bruederle also said that Geithner's proposal to cut imbalances smacked of "planned economic thinking." The IMF is forecasting Germany's current account surplus to rise to 6.055% of GDP this year from 4.890% last year before shrinking to 3.884% by 2015. Speaking later, U.S. Treasury Secretary Timothy Geithner claimed that he hadn't heard Bruederle's comments. Although he wouldn't comment directly, he did reaffirm the U.S. government's support for a strong U.S. dollar. "We recognize our responsibility for financial stability that comes with the dollar," he said.
But Germany's wasn't the only opposition to the Geithner plan. As early as late Friday, Noda noted the level of caution -- if not outright opposition -- among G20 countries to the Geithner proposal. Noda was more diplomatic about the Geithner proposal than his German colleague, but also noted that Japan's current account surplus as a percentage of GDP stood at 2.8% last year "and is likely to stay well within the range through 2015." He said Friday that the current account balance is a useful reference point for measuring imbalances, but also argued that various factors affect current account flows and that the causes of surpluses and deficits vary from country to country.
One mystery of the Korea meetings was the position of China, now set to replace Japan as the world's second-largest economy. Chinese officials were out in force, but weren't talking to the media and, apparently, weren't doing much talking to their fellow delegates either.
An official Xinhua News Agency report filed in the hours after the G20 meetings said that Geithner's proposal was "met with negative sentiment...There was doubt across the board about Geithner's proposal. China, Russia, Germany and Saudi Arabia's trade surpluses are way above Geithner's proposed limit, while the U.S.'s trade deficit stands at 3% of GDP," it said, suggesting that the Xinhua reporters had been briefed by otherwise inaccessible Chinese government representatives.
Geithner told reporters after the release of the communique that "China has played a constructive pragmatic role and is very supportive of finding a multilateral framework." But Noda said late Friday that China hadn't made its position on the proposals clear, and there was no indication of any more clarity by the end of the talks on Saturday.
(The Chinese at least did better than the Brazilians, whose central bank governor Henrique Meirelles and Finance Minister Guido Mantega -- who bears responsibility for being the first to publicly label the current situation a global "currency war" -- didn't even show up at the G20 meeting. They sent their deputies.)
Still, the Chinese may just have been letting the advanced countries argue among themselves to sideline the Geithner plan. The IMF is forecasting China's current account surplus as a percentage of GDP to fall to 4.697% this year from 5.96% in 2009, and then to gradually rise over the following years to 7.796% by 2015, which would make China one of the biggest targets if something like the Geithner plan were ever agreed.
The current account surplus lies at the heart of a sharp disagreement between the Chinese government and the IMF, and specifically the fund's assertion that the surplus points to a "substantially undervalued" yuan. Beijing argues that the IMF's assessment is flawed in that the current account surplus has been falling and, according to its forecasts, will continue to do so.
As with previous meetings of this nature, there was also little progress on the row over currencies and currency intervention. Bruederle may have attacked the U.S.' "indirect manipulation," but there was little public comment on China's very direct manipulation of the yuan. Many believe it's a primary cause of global imbalances and Geithner believes it is prompting other countries to intervene in foreign exchange markets to hold down the value of their currencies.To be continued when the leaders meet next month in South Korea. Certainly, there is much that's been left unresolved despite the lip service.
The G20 communique included a vow to "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies." But the statement also bears the hallmarks of the Chinese leadership, with a pledge by the advanced economies -- particularly those of reserve currencies (ie. the U.S. dollar, euro and yen) -- to "be vigilant against excess volatility and disorderly movements in exchange rates."
It's not a question of China sharply appreciating the yuan, Beijing argues, but of the U.S. stabilizing, rather than debasing, the dollar and getting its own house in order. That's an argument that Washington and Beijing have been having for several years now. The Chinese argument appeared to at least hold its own -- if not win more converts -- at this weekend's G20.
The cooperation which marked the world's response to the global financial crisis has all but evaporated in favor of a very public row among the world's major economies which sounds much like the one that the U.S. and China have been having for all these years. And the G20 talks which just ended here leave the impression that row is set to continue, perhaps for some time.