G20 to set imbalance guidelines by 2011
Leaders agree to avert worst of currency war for now
By Kim Jae-kyoung
Leaders of the Group of 20 (G20) member nations reached a vague compromise Friday on currency and trade issues, calling for a workable resolution for the next G20 summit in France, slated for November next year.
In the Seoul Declaration released following the two-day G20 Seoul Summit, the participating heads of state agreed that “indicative guidelines” on current account balances will be initiated and undertaken in due course.
The declaration calls for an action plan under which they will call on their framework working group, with technical support from the IMF, to develop numerical guidelines, with the progress to be discussed by finance ministers in the first half of 2011, according to the communique.
Although the agreement is seen as progress as they set imbalance guidelines, many still doubt the feasibility of the communique as it is too vague and unbinding with no numerical targets.
The U.S., supported by Korea, has called for a numerical limit ― but this move has met a strong backlash from countries such as China, Japan and Germany. U.S. Treasury Secretary Timothy Geithner had urged each country in the G20 to adopt numerical targets to limit excesses in trade surpluses or deficits.
At a press conference following the divisive talks, President Lee Myung-bak said, “The G20 made progress at the Seoul summit as leaders agreed to further strengthen global cooperation for more sustainable and balanced growth.”
“One of the biggest achievements was that the countries agreed on setting up a timeline to introduce indicative guidelines to resolve the global imbalance,” he added.
In their joint statement, the leaders also promised to refrain from any competitive devaluation of currencies. "These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries," the communique said.
On the surface, currency tensions are expected to ease with the agreements but there is still a high risk that foreign exchange disputes between major countries could turn into currency wars as the diplomatic wording of the statement was not binding, nor specific.
Risk of currency war lingering
Market analysts showed a mixed reaction to the agreement but most remain negative on the outcome.
“Hopes were high after the finance ministers meeting (in Gyeongju) that the leaders’ summit would produce more concrete action, especially on global imbalances. Those hopes faded after the Fed announced another round of quantitative easing (QE2) and countries began to criticize U.S. policy. Low expectations for the summit were realized,” ING Group senior Asia economist Tim Condon told The Korea Times.
“I don’t think the G20 made meaningful progress to solve the global imbalance at the Seoul summit. By failing to agree on specific proposals for reducing the imbalances the declaration may have increased the likelihood of a currency war. I expect the U.S. Treasury will now be forced to name China a currency manipulator,” he added.
On the other hand, Goldman Sachs Asset Management Chairman Jim O’Neil, who coined the acronym BRICs (Brazil, Russia, India and China), saw the summit as a big progress. “The Chinese have essentially committed to a current account surplus limit, and more Chinese yuan appreciation,” he said via email from London.
Other than the currency and trade balance issues, the G20 communique did show plenty of progress on other issues, as the leaders agreed to fully endorse most of the items agreed upon by finance ministers in Gyeongju last month.
The declaration, signed by the heads of 19 states and the EU, includes a “standstill declaration” to avoid protectionism, the Korea Initiative ― an agenda item initiated by Korea on a global financial safety net and development issues ― and the strengthening of a macro-prudential policy framework.
The Korea Initiative received the international spotlight as the leaders endorsed Seoul's proposal to establish global financial safety nets and development goals to better assist developing economies.
G20 leaders also supported agreements reached in Gyeongju to increase the capital ratio of banks and strengthen regulations on systemically important financial institutions, better known as SIFIs. They welcomed the IMF’s decision to shift 6 percent of its voting rights from rich countries by January 2012. Plus, they agreed that the Doha round of global free trade talks should be brought to a successful conclusion, possibly even next year.
In addition, the G-20 heads of state endorsed what they named the "Seoul Development Consensus for Shared Growth" and a multi-year action plan that calls for efforts to support developing economies and low-income countries.
"We commit to and prioritize full, timely and effective implementation of the multi-year action plan, understanding its high potential to have a positive transformative impact on people's lives, both through our individual and collective actions and in partnership with other global development stakeholders," the communique said.