The coalition of leading world economies known as the Group of 20 faces growing strains, with China and other countries increasingly at odds over how to prevent another financial crisis.
The sharpening divisions pose a critical test for the G-20, which must have the complete agreement of each country in order to advance new policies.
The G-20 proved successful at coordinating policy responses during the recent financial crisis and global recession. But now consensus has become elusive as economies recover at much different speeds, with much different interests. China and other emerging economies are growing quickly, Europe and Japan are expanding slowly, and the pace of the United States is somewhere in between.
The U.S. and other countries want to correct what they view as an unbalanced global economy in which the U.S. serves as the world's largest consumer, running a huge trade deficit, while China and other economies rely heavily on exports and run large trade surpluses. "Rebalancing" has become a key theme of the international talks.
Key to this, many G-20 officials believe, is persuading China to allow its currency, the yuan, to rise in value more rapidly. They see the yuan as undervalued, boosting China's exports by making them cheaper in world markets. The officials argue that China's currency policy is making it harder for rebalancing to take place.
However, China and other big exporters are reluctant to move away quickly from an economic model that has generated rapid growth in their countries, benefiting their citizens. Thus, Chinese officials have resisted pressure to let the yuan rise faster.
These tensions were apparent during the meetings in Paris. Many G-20 countries wanted to set up a new way to determine if any country's domestic policies are leading to economic imbalances—such as by measuring trade deficits and surpluses, government budget deficits, and large capital inflows. But Chinese officials nearly torpedoed the seemingly technical agreement by rejecting efforts to include "exchange rate" as a specific "indicator" of distortive policies.
To satisfy all sides, officials crafted a convoluted 53-word sentence that could be interpreted differently based on individual countries' interests. The sentence says exchange rates and fiscal and monetary policies will be taken into "due consideration" as part of a broader measurement when determining whether a country's policies lead to imbalances.
"It means what it means what it means, just like a rose is a rose is a rose," a defensive Christine Lagarde, France's finance minister, said of the sentence after the negotiations ended.
The G-20 is the primary forum for world leaders to discuss economic policy, but it relies on peer pressure to drive results. If one country balks at any detail, an entire proposal can collapse. That has shifted the G-20's focus to marginal deals, similar to what consumed them in Paris.
Just hours before the deal was finalized Saturday afternoon, several G-20 officials told reporters talks had collapsed and they would have to regroup in Washington in April. Discussions were described at times as acrimonious, draining, and heated
The G-20 process could become even more cumbersome later this year if officials try to pressure China to accept even more changes.
Still, several G-20 officials hailed the agreement as significant. German Finance Minister Wolfgang Schäuble said China's acceptance of the deal showed "the Chinese recognize that it's in the Chinese interest to step-by-step move toward a direction everyone thinks is necessary."
There will be at least one more meeting of finance ministers before President Barack Obama and other heads of state meet in France in November. At that meeting, officials hope to have in place a system for using the new "indicators" to actually measure whether any country's policies, such as interest rate decisions and exchange rates, are distorting things like investments and trade.
"This process is going to take time," Treasury Secretary Timothy Geithner said after the Paris meeting. "This is not something that's going to have immediate traction."
Source: http://online.wsj.com
The sharpening divisions pose a critical test for the G-20, which must have the complete agreement of each country in order to advance new policies.
The G-20 proved successful at coordinating policy responses during the recent financial crisis and global recession. But now consensus has become elusive as economies recover at much different speeds, with much different interests. China and other emerging economies are growing quickly, Europe and Japan are expanding slowly, and the pace of the United States is somewhere in between.
The U.S. and other countries want to correct what they view as an unbalanced global economy in which the U.S. serves as the world's largest consumer, running a huge trade deficit, while China and other economies rely heavily on exports and run large trade surpluses. "Rebalancing" has become a key theme of the international talks.
Key to this, many G-20 officials believe, is persuading China to allow its currency, the yuan, to rise in value more rapidly. They see the yuan as undervalued, boosting China's exports by making them cheaper in world markets. The officials argue that China's currency policy is making it harder for rebalancing to take place.
However, China and other big exporters are reluctant to move away quickly from an economic model that has generated rapid growth in their countries, benefiting their citizens. Thus, Chinese officials have resisted pressure to let the yuan rise faster.
These tensions were apparent during the meetings in Paris. Many G-20 countries wanted to set up a new way to determine if any country's domestic policies are leading to economic imbalances—such as by measuring trade deficits and surpluses, government budget deficits, and large capital inflows. But Chinese officials nearly torpedoed the seemingly technical agreement by rejecting efforts to include "exchange rate" as a specific "indicator" of distortive policies.
To satisfy all sides, officials crafted a convoluted 53-word sentence that could be interpreted differently based on individual countries' interests. The sentence says exchange rates and fiscal and monetary policies will be taken into "due consideration" as part of a broader measurement when determining whether a country's policies lead to imbalances.
"It means what it means what it means, just like a rose is a rose is a rose," a defensive Christine Lagarde, France's finance minister, said of the sentence after the negotiations ended.
The G-20 is the primary forum for world leaders to discuss economic policy, but it relies on peer pressure to drive results. If one country balks at any detail, an entire proposal can collapse. That has shifted the G-20's focus to marginal deals, similar to what consumed them in Paris.
Just hours before the deal was finalized Saturday afternoon, several G-20 officials told reporters talks had collapsed and they would have to regroup in Washington in April. Discussions were described at times as acrimonious, draining, and heated
The G-20 process could become even more cumbersome later this year if officials try to pressure China to accept even more changes.
Still, several G-20 officials hailed the agreement as significant. German Finance Minister Wolfgang Schäuble said China's acceptance of the deal showed "the Chinese recognize that it's in the Chinese interest to step-by-step move toward a direction everyone thinks is necessary."
There will be at least one more meeting of finance ministers before President Barack Obama and other heads of state meet in France in November. At that meeting, officials hope to have in place a system for using the new "indicators" to actually measure whether any country's policies, such as interest rate decisions and exchange rates, are distorting things like investments and trade.
"This process is going to take time," Treasury Secretary Timothy Geithner said after the Paris meeting. "This is not something that's going to have immediate traction."
Source: http://online.wsj.com
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