Continuous growth will narrow trade gaps, says G-7

Washington: Finance chiefs from the Group of Seven nations expressed confidence that global economic growth will reduce lopsided trade and investment flows.

The G-7’s finance ministers and central bankers said after meetings in Washington that demand in Asia and Europe is strong enough to offset a slowdown in the U.S. An increasingly even pattern of growth will ease trade gaps and extend the strongest world expansion since the 1970s, they said in their most positive remarks in four years.

“The U.S. is slowing, and there is enough growth in the rest of the world to offset that," said Sophia Drossos, a currency strategist at Morgan Stanley in New York who previously worked at the Federal Reserve. “This is what they want to bring about the rebalancing."

Policy makers’ confidence in European demand and renewed call for Asian nations to allow movements in their currencies may spur further declines in the dollar, which has fallen as U.S. growth weakened. The group pledged to augment the global economy by reducing labor regulations, cutting fiscal deficits and fighting protectionism.

The group reprised its February statement on the need for currencies to reflect economic “fundamentals" and avoided citing the slump in the yen.

Making Progress

Since September 2003 meeting in Dubai, the G-7 has identified trade deficits and surpluses of key economies as a risk to global growth. “We are confident that the continuation of our policies will support economic growth and contribute to reduce international imbalances," the officials said.

Government reports last week showed the U.S. trade gap narrowed in February and China’s current-account surplus shrank last month. The International Monetary Fund forecasts a 4.9% increase in world gross domestic product this year even while predicting the weakest U.S. expansion since 2002.

“We have always wanted the world economy to fly on more than one wing," said U.K. chancellor of the Exchequer Gordon Brown. U.S. treasury secretary Henry Paulson said the U.S. economy remained “healthy" and that “more needs to be done" by every government.

European ministers and central bankers, who meet this week in Berlin, said they are comfortable with the stronger euro because of a robust economy. Paulson refrained from indicating concern about the dollar’s drop.

‘Strong Euro’

“A strong euro is in the interest of Europe," Dutch Central Bank Governor Nout Wellink said. Belgian finance minister Didier Reynders said he is “optimistic" in Europe’s export and growth prospects.

“The implications for foreign exchange markets are that recent tends will likely persist in the near-term," economists led by London-based Thomas Stolper at Goldman Sachs Group Inc. said on 15 April.

The euro has climbed 12 percent against the dollar in the past year, and jumped to a record versus the yen on 16 April.

The G-7 talks are overshadowed by a furor over World Bank President Paul Wolfowitz being investigated by the bank’s board for dictating the terms of a promotion for his partner. While the U.S. endorsed him, the U.K. and Germany withheld their backing.

Hedge Funds

The group also remained divided over whether to tighten oversight of hedge funds. European governments, led by Germany, renewed a push for the pools of capital to subscribe to a code of conduct. U.S. Treasury undersecretary Robert Steel said that it isn’t “necessary." American officials said lenders and investors are best placed to monitor risks.

German deputy finance minister Thomas Mirow and Bank of Italy governor Mario Draghi suggested the U.S. approach falls short. Mirow said on 13 April that banks may overlook risks as they compete for business from hedge funds. Draghi said “there are signs that credit standards have been weakened."

G-7 officials met on 15 April with about a dozen representatives of hedge funds in Washington. The group is compiling information on the industry in preparation for discussions by leaders at a summit in Germany in June.

Paulson stepped up his call for rule changes allowing the IMF to monitor and disclose cases of countries manipulating their currencies. He said on 14 April, the overhaul is needed “very soon."

China’s Vice Central Bank governor Hu Xiaolian countered in his IMF statement the fund should “not overestimate the role of the exchange rate."

Trade Talks

G-7 officials said concluding struggling trade talks is “imperative." World Trade Organization director-general Pascal Lamy said that a deal is “feasible." The group also said it would continue work on nurturing domestic bond markets in emerging nations at a 9-10 May Frankfurt conference.

The G-7 oversees almost two-thirds of the world economy and is composed of the U.S., Japan, Germany, U.K., Italy, France and Canada.

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