King Says G-20 Needs `Grand Bargain' to Avert Protectionism
Bank of England Governor Mervyn King
Paul Thomas/Bloomberg
Bank of England Governor Mervyn King, seen here, said yesterday, “What is needed now is a ‘grand bargain’ among the major players in the world economy.”
Bank of England Governor Mervyn King, seen here, said yesterday, “What is needed now is a ‘grand bargain’ among the major players in the world economy.” Photographer: Paul Thomas/Bloomberg
Oct. 20 (Bloomberg) -- Bilal Hafeez, global head of foreign exchange strategy at Deutsche Bank AG, talks about the outlook for currency markets and the impact of the U.K. government's deficit-cutting measures on the pound. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
Bank of England Governor Mervyn King said global finance chiefs need to reach a “grand bargain” to coordinate economic policies and avert a round of protectionism.
Speaking before Group of 20 finance ministers and central bankers meet in South Korea on Oct. 22-23, King said major economies’ policies are in “direct conflict” with each other and that “collective” action is required to rebalance the world economy. Failure to find common ground risks the imposition of trade barriers and weaker global growth, he said.
“What is needed now is a ‘grand bargain’ among the major players in the world economy,” King said in a speech yesterday to business leaders in Dudley, England. “A bargain that recognizes the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism.”
King echoed investors’ fears that global policy making is fracturing as countries pursue self-interest by relying on cheaper currencies to spur growth, forcing trade rivals to adopt their own measures to maintain a competitive advantage. China faces accusations of keeping the yuan undervalued to boost exports, while the shift toward easier monetary policy in the U.S. and other nations is blamed for propelling capital into emerging markets.
‘Innocent Victims’
King also said yesterday that some gauges of U.K. inflation are “extremely subdued,” signaling he may favor further policy easing.
Some developing economies with floating currencies, which King called “innocent victims,” are retaliating. Brazil this week raised taxes on foreign investments in fixed-income securities for the second time in a month to restrain the real and India is indicating it may intervene in currency markets if its rupee appreciates past 43 against the dollar.
“The risk is that unless agreement on a common path of adjustment is reached, conflicting policies will result in an undesirably low level of world output, with all countries worse off as a result,” King said. “The need to act in the collective interest has yet to be recognized, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism.”
To return the world to an even keel, countries with low savings must cut back their spending at the same time as those with large current account surpluses spark domestic growth and stop relying on exports for strength, King said.
‘Visible’ Challenge
He suggested officials focus first on agreeing the right speed of adjustment necessary and then the policies required to meet such targets. Among the tools that should be used are exchange rates, plans to cut budget deficits and structural reforms, he said.
“The challenge is clearly visible,” King said. “There is a clear difference between the path of adjustment desired by the surplus countries, which are faced with the need for a longer- term structural shift away from reliance on exports, and the path of adjustment preferred by the deficit countries, which are under greater near-term pressure to reduce the burden of debt in both private and public sectors.”
While the G-20 serves as a “natural forum” for such discussions, King signaled little faith in its ability by saying real agreement would require a “revolution.”
He is not alone in expressing concern with the outlook for global policy making. European Central Bank President Jean- Claude Trichet said Oct. 16 that coordination of macroeconomic policy is the “least advanced” area of global governance.
‘Trade War’
South Africa Finance Minister Pravin Gordhan said yesterday there is a “serious danger of competitive devaluations” and “if we continue on this road, it will result in a trade war.”
U.S. Treasury Secretary Timothy F. Geithner said this week that a country can’t “devalue its way to prosperity” and that the U.S. will not engage in such a strategy.
G-20 finance ministers and central bankers may struggle to find a solution this week given the different domestic needs of their economies, said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. The officials convene Oct. 22-23 in Gyeongju to shape an agenda for next month’s Seoul summit of leaders.
“It’s unlikely they’ll find common ground,” McCormick said. “The status quo will be maintained because economies are moving in different directions.”
The credit crisis demonstrates the need to “find better ways of ensuring the right collective outcome,” King said. While before, countries were “rationally pursuing their own perceived self interest,” the recent turmoil in financial markets has demonstrated how doing so “did not make sense in aggregate,” he said.
To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net.
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