French President Nicolas Sarkozy wants to persuade the Group of 20 nations to establish a smaller forum to address global currency issues because the larger body is too unwieldy, three French government officials said.
For Sarkozy, who holds the rotating leadership of the G-20 and Group of Eight this year, establishing the club underscores the top item on his G-20 agenda: mediating the dispute between China and the biggest economies with freely traded currencies, said the officials, who spoke on condition of anonymity because he has yet to agree to a plan.
While the G-20 replaced the G-7 as the main body for international economic policy making in 2009 to reflect the rise of emerging markets such as China, it has failed to follow its tradition of forging positions on currencies because not all of its members allow their currencies to float freely.
“The French appear to want a smaller group of countries to address currency matters because the G-20 looks too large and the G-7 too small,” said Gerard Lyons, chief economist at Standard Chartered Bank in London.
Possible outcomes include opening the G-7 to China or shrinking it to a G-5, with one euro-region representative, the officials said. Other emerging economies could also join, they said. The G-7 comprises the U.S., Japan, Germany, the U.K., France, Canada and Italy. Russia makes it the G-8.
Sarkozy has regularly complained that the euro is too strong against the yuan and the yen, hurting European export competitiveness. The euro is 8.2 percent overvalued against the dollar even after weakening 4 percent in the past 12 months, according to an index compiled by the Organization for Economic Cooperation and Development.
He has also raised the issue of reducing the dollar’s role as a reserve currency. At the World Economic Forum in Davos last January, Sarkozy said: “We can’t have on one hand a multipolar world and on the other hand a single reserve currency.” Sarkozy is scheduled to go to this year’s Davos meeting on Jan. 27.
Like the debate over adding permanent members to the United Nations Security Council, Sarkozy’s ambition may founder on political rivalries and policy disputes, says Jean Pisani-Ferry, a former European Union and French government economic adviser who runs the Bruegel research institute in Brussels.
China may view it as a “risk” that it will be pressed to let the yuan rise, he said. Other hurdles include drawing the line on membership and the risk of weakening the G-20, he said.
The U.S. wants to keep currency matters at the G-20, Charles Collyns, assistant U.S. Treasury secretary for international finance, said Jan. 20 in Washington.
“Inevitably, currencies are discussed and will continue to be discussed at the G-20,” he told a panel discussion on the topic. The G-20 is “the premier forum for international economic coordination.”
The most “pragmatic” decision would be to add Brazil, Russia, India and China to a G-7 where euro countries would merge in order to “keep it smaller than the G-20 and by that way more powerful in terms of quick decisions,” said Sebastian Wanke, an economist at Dekabank in Frankfurt.
Finance Minister Christine Lagarde has hinted at the French plans. In October in Washington, she said she was “not sure that 20 is the absolute right number” to “discuss effectively currencies.” Earlier this month, Lagarde wished journalists luck in explaining G-20 talks, including how to “legitimize the existence of a G-5 rather than a G-14 or a G-20.”
Sarkozy is convening what he has called a “seminar” in Beijing in March to discuss the monetary system.
It was a French leader, President President Valery Giscard d’Estaing, who in 1975 gathered the leaders of West Germany, Italy, Japan, the U.K. and the U.S. at a summit in Rambouillet, France.
The group soon expanded to the G-7. Its influence reached its zenith through the Louvre and Plaza currency accords of the 1980s and with its responses to financial crises in Asia, Latin America and Russia in the 1990s. It hasn’t intervened in foreign exchange markets since a rescue of the euro in September 2000.
“In 1975, when President Giscard d’Estaing had the idea to create the G-7 it was after a monetary crisis and it was above all to talk about currency,” Sarkozy said at a press conference today. “The question that we have to ask today is: is the G-7, which has become the G-8, legitimate to talk currencies. I challenge this idea because it doesn’t include China.”