Cooperation or clash? G20 at a crossroads
Two years ago, the group of the world’s 20 major economies (the G20) announced their shared ambition: to manage the global economic crisis more efficiently and more transparently than the old industrialized nations (G8), and to prevent further financial market crises or economic downturns. Only two years later, the G20 now stands at a crossroads. At the Group’s summit meeting in Seoul on November 11 and 12, selfish interests may well gain the upper hand, pushing the group’s previous willingness to cooperate into the background. There is talk of currency wars as well as of an impending crisis with collapsing trade comparable to those of the 1930s.
“It’s the financial sector, stupid!” is what many may want to shout at the G20, who have so far fallen short of achieving their declared founding goal of reforming the international financial markets. After all, the smooth-tongued declarations made at the four prior summit meetings did not result in much more than a half-hearted commitment to implement a very slow and gradual increase of the capital standard of the banks (Basel III) and feeble reform efforts at the regional (EU) and national levels.
The agenda of the G20 is fraught with serious shortcomings. The core task of reforming the international currency and financial system has still not been addressed. For example, to date, there is no functioning mechanism for the adjustment of exchange rates and current account imbalances. There is not even a general consensus as to when a currency should be considered over- or undervalued. The lack of such a mechanism or consensus, constituting a loophole of sorts, then allows the economies of the G20 to focus on their own interests, all at the expense of reaching a global solution.
No decisions have been made within the framework of the G20 concerning international insolvency proceedings for national debtors or a liability or risk participation of private banks in the case of new crises. It should be mentioned, however, that the topics of exchange rates, commodity speculation, and the obsolete role of the dollar as global reserve currency are included on the agenda of the French G20 presidency, to commence soon after the summit meeting in Seoul.
Never before has the need for international action in these matters been as apparent as it is now, prior to this 5th summit in Seoul. Timothy Geithner, the United States Secretary of the Treasury, wants to establish international intervention thresholds for current account deficits and surpluses. As a first step toward this goal, the United States is now, in Seoul, advocating the establishment of an early warning system that would identify “excessive” surpluses and deficits. Of particular interest here is the fact that, for the first time, the United States wants to introduce adaptation regulations for deficit and surplus countries—a policy first suggested by John Maynard Keynes at the Bretton Woods conference in 1944, and rejected by the United States at the time. But the tables have turned since the days of Bretton Woods. Back then, the United States was still a surplus country and could impose its will on the rest of the world. Today, it stands on the other side of the fence.
Unfortunately, Geithner’s plan is all too transparent. It originated from a quasi-obsession with urging the new economic giant China toward a revaluation of its currency, thereby making China’s exports to the United States and elsewhere more expensive. However, for the United States to cure its economic malaise simply by modifying exchange rates, the modifications would have to be so drastic that economic catastrophes elsewhere, such as in China, would be inevitable. Moreover, “nation bashing” has never proven to lead to a new, sustainable system.
Nevertheless, the Geithner plan undoubtedly has one advantage: By focusing on current account deficits, adaptation measures would not necessarily have to be based on exchange rates. A rebalancing could also be achieved by strengthening domestic demand (in the case of surplus countries) or by curbing domestic demand or strengthening exports (in the case of deficit countries). Of course, this concept is met with resistance from surplus countries—just as it was formerly met with resistance from the United States. Spearheading this resistance today is the German Minister of Economics and Technology, Rainer Brüderle, who, at the finance ministers meeting of the G20 at the end of October, prior to Seoul, infamously accused the United States of going astray by adopting the mechanism of a planned economy.
Meanwhile, China has done a great deal in recent years to strengthen its internal demand; much more than has Germany, for example, which was banking on a new export boom after the crisis. Germany’s exorbitant current account surplus is not only an imposition on its trade partners, but is also highly risky for its own economy. With a view toward a more sustainable development—and toward the mitigation of social tensions at the domestic level—the German economy would do well to reduce its heavy external dependence. The Chinese are beginning to realize how problematic their nearly exclusive focus on exports has become. In Germany, meanwhile, a new campaign to push exports has been making waves.
The G20 is thus faced with significant contradictions, which demonstrate, in all clarity, that there is no way around the development of a new international financial and currency system. The alternative is perpetual currency chaos and constant financial crisis. The situation is in no way made simpler by the large quantities of cheap and hot money that is once again inundating the markets of the emerging economies. All this is reason for the currency carry trade to celebrate. Investors in countries with low interest rates, for example the United States, take out cheap loans to invest in countries offering higher yields, such as Thailand and Brazil—a scenario that also preceded the last two financial crises. In the absence of a functioning system of international exchange rate management, it is no surprise that these higher-yield countries—from Brazil, to South Korea, to Thailand—turn to bilateral solutions (such as capital controls) in order to protect themselves against new waves of speculation. In this context, the new round of monetary policies of the United States, namely, the policy of quantitative easing, is in no way contributing to making the emerging markets any more cooperative.
Given these current conditions, the Seoul summit can, at best, prevent a clash of the major economies and maintain open discussion of cooperative new regulation of international currency and financial politics. With the passing of the G20 presidency from Korea to France, this debate can perhaps be expected to take on more substance. Only then might the current mandate of the G20 finally come closer to its original goals.
Barbara Unmüßig is on the executive board of the Heinrich Boell Foundation; Rainer Falk is publisher of the news brief Weltwirtschaft & Entwicklung (www.weltwirtschaft-und-entwicklung.org).