Group of 20 finance chiefs are struggling to agree whether to set targets for their current account imbalances as a way of defusing tension over currencies before it sparks a trade war.
G-20 finance ministers and central bankers began talks in Gyeongju, South Korea, today after weeks of wrangling over whether nations from the U.S. to China are relying on weaker exchange rates to spur growth.
Seeking a solution, U.S. Treasury Secretary Timothy F. Geithner proposed G-20 members pursue policies to reduce trade gaps “below a specified share” of their economies, according to an Oct. 20 letter obtained by Bloomberg News. That suggestion today split the emerging and industrial countries.
“Setting numerical targets would be unrealistic,” said Japanese Finance Minister Yoshihiko Noda, while German Economy Minister Rainer Bruederle rejected a “command economy” approach and Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify. In interviews with Bloomberg Television, Canadian Finance Minister Jim Flaherty said the idea was a “step in the right direction” and Australian Treasurer Wayne Swan called it “constructive.”
Repeating themes he has pushed for the last month, Geithner told his colleagues not to seek “competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency.”
He urged countries with persistent current account surpluses to “undertake structural, fiscal, and exchange rate policies to boost” domestic demand and those with “significantly undervalued currencies” to allow them to “adjust fully over time.” In return, advanced economies will pare their budget shortfalls, he said.
Geithner suggested to counterparts that current account deficits or surpluses of no more than 4 percent of gross domestic product be the aim, Noda said. The IMF this month estimated China’s surplus will swell to 7.8 percent of GDP in 2015 from 4.7 percent this year. The U.S. wants the Washington- based lender to monitor progress if goals are adopted.
Stocks in Europe fell from a six-month high, bonds gained and the dollar fluctuated. The dollar strengthened to $1.3882 per euro as of 9:43 a.m. in London from $1.3920 in New York yesterday. It was little changed at 81.27 yen from 81.33 yen. The euro bought 112.84 yen from 113.22 yen.
The G-20 officials are meeting in a bid to end what Brazilian Finance Minister Guido Mantega calls a “currency war” as next month’s Seoul summit of leaders nears. China’s restraint of the yuan even as it runs a trade surplus and the recent slide of the dollar as the Federal Reserve shifts toward easier monetary policy are in the spotlight.
Nations caught in the middle such as Brazil and South Korea are embracing capital controls or intervening themselves to stay competitive with China and limit inflows of speculative cash from North America and Europe.
This has raised concern from policy makers and investors that the friction will spark a round of devaluations and retaliatory protectionism, derailing an already fragile global economic recovery.
“If we fail to reach an agreement now and delay it to next time, the global economy will face a serious risk and it will unnerve people,” South Korean President Lee Myung Bak told the meeting. He joked he “may have to stop buses, trains or planes on your way back home” if the officials failed.
Focusing on current account imbalances takes the debate beyond the thorny topic of currencies and allows policy makers to address excess U.S. demand and Chinese savings, according a South Korean official.
Limiting talks to foreign exchange is too inflexible for nations with trade surpluses and would make agreement less likely, the official said. Looking at the current account allows countries to decide on which tools to adopt to reduce them, including exchange rate appreciation, he said.
“It’s fraught with difficulties, but a framework would be an attempt at looking at currency revaluation and cooperation without resorting to a shouting match,” said Kit Juckes, head of foreign exchange research at Societe Generale SA in London.
The G-20 policy makers are also debating whether to make their first joint comment on currencies since their leaders began meeting in 2008, having previously resisted remarks for fear of alienating China. A draft statement yesterday included a pledge to avoid “competitive undervaluation” of exchange rates. The final text is scheduled for release tomorrow and won’t be finalized until then.
Leaders said as recently as an April 2009 summit in London that they would “refrain from competitive devaluation” of currencies and at June talks in Toronto said exchange rates should avoid excess volatility and be made more flexible in emerging markets.
Setting current account targets still leaves Asian economies under pressure to allow their currencies to gain, said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. His estimates on the basis of purchasing power have the yuan, Thai Baht and Philippine Peso undervalued by at least 70 percent.
It may nevertheless provide a way of persuading such nations to revalue in lock-step rather than be wary of acting alone only to lose competitiveness as others hold back, said Juckes.
China has limited gains in the yuan to about 2 percent against the dollar since a June pledge to introduce more flexibility, forcing other countries to try and control their exchange rates to keep a trading edge with the world’s largest exporter. South Korea is discussing several measures including a bank tax or levy on financial transactions and Brazil this week raised taxes on foreign inflows for the second time this month.
Geithner’s proposal leaves questions to be answered, said Tim Adams, a former U.S. Treasury official. Among them is whether governments will detail how and when they’ll meet the goals and what happens if they’re missed. The risk is a repeat of the euro-area budget deficit targets which were violated in a third of the euro’s first decade, he said.
The G-20’s ability to carry out its own commitments has also proved patchy. A regular vow to avoid protectionism hasn’t stopped its members imposing about 400 measures that hurt trading partners in the past two years, according to Global Trade Alert.
The skirmish over exchange rates tests the G-20’s ability to strike consensus after it became the main body for shaping international economic policy a year ago. After uniting to bail out banks and cut interest rates and taxes to fight the credit crisis, members have since clashed on the withdrawal of stimulus and imposing taxes on financial speculation.
“It seems a bit of a stretch to look for some sort of unified currency policy to come out of the G-20,” said Thin. “It’s hard enough to get any sort of consensus in the G-7.”
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