Seoul: Leaders of the world’s largest economies vowed action on Friday to seek more balanced growth, but delayed until next year the contentious work of defining problems that threaten the global recovery.
The delay by the Group of Twenty (G-20) industrial and developing powers in defining the external imbalances they had vowed to address represents a blurring of what at first had appeared to be clear goals designed to counter the growing threat of trade and currency wars, in which countries seek competitive advantage by weakening their currencies.
The US and G-20 host South Korea ran into strong opposition from such exporting powers as China and Germany to a proposal to quantify limits on current account surpluses and deficits.
Uneasy steps: China’s President Hu Jintao (bottom centre) walks past other leaders at the G-20 Summit in Seoul, South Korea, on Friday. Tomohiro Ohsumi/Bloomberg
At the heart of the controversy are fundamental issues of how countries would need to restructure their economies. “These are not going to be easy issues to resolve,” said Canadian Prime Minister Stephen Harper. “But I think we’ve got everyone talking the same language, everyone understanding longer-term what has to be done.”
G-20 heads of government said after a two-day summit in Seoul that they will seek to keep external imbalances “sustainable” by coming up with “indicative guidelines composed of a range of indicators” to “serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken”.
The G-20 leaders will aim for a leaders’ summit late next year to develop an imbalance assessment, with help from the International Monetary Fund (IMF).
The group also endorsed a timetable for a drastic overhaul of the framework for dealing with globally systemically important global banks, to ensure the taxpayer is never again left to foot the bill if “too big to fail” banks get into trouble. And it vowed to complete an ambitious trade deal, calling 2011 a “critical window of opportunity” for the Doha Round of global trade talks.
Another success members could point to that was largely sealed before the meeting included reform of IMF governance. But the main focus of the G-20 was on global imbalances, which IMF warns are set to grow in the coming years.
The US has pushed China to let the yuan rise more and for non-binding targets to limit imbalances. China, in turn, has won adherents to its position that the US Federal Reserve’s lax monetary policy is weakening the dollar and pushing a wall of destabilising speculative capital into emerging markets.
In acknowledgement of the issue, the communiqué appeared to give member nations the green light on capital controls. Countries with “overvalued flexible exchange rates” may take “carefully designed macro-prudential measures”, it said.
Sticking to language their finance ministers agreed to in late October, the G-20 leaders vowed to move “toward more market-determined exchange-rate systems” and avoid “competitive devaluation of currencies”.
The leaders in Seoul added that they were committed to “enhancing exchange-rate flexibility to reflect underlying economic fundamentals”.
The G-20 clearly struggled over how to define and quantify the “indicative guidelines” meant to gauge progress, portending further tough political battles over reining in global imbalances. The governments can’t even agree on what is driving global imbalances and the role issues like currencies play.
A key annex to the G-20 communiqué, originally meant to outline country-by-country policy recommendations, instead merely restated positions each government has already laid out.
But although the summit failed to resolve key issues, some said the group is keeping to a viable path. The Seoul host, South Korean President Lee Myung-bak, went as far as to predict global currencies will stabilize after the G-20 agreed on market-determined exchange rates. “We’re now getting out of the so-called ‘currency war’ as the summit wraps up. Currencies will stabilize,” he said.
French President Nicolas Sarkozy, taking over the chairmanship of the G-20, said he will seek to foster international consensus on the contentious issue of currency misalignments over the coming year. “The idea is not to stall talks on solutions that would be put on the table too early,” Sarkozy said. “We want to try and build a consensus.”
Without cooperation, IMF warns, not only will the G-20 fail to achieve a much-needed boost to growth, but it could tip the scales on the European sovereign-debt crisis and fuel capital flows into emerging countries that overheats their economies.
—The Wall Street Journal
Laurence Norman, Nathalie Boschat and Nirmala Menon also contributed to this story.