Officials thank China as deal paves way for successful summit
By Cho Jin-seo
GYEONGJU - The Group of 20 (G20) nations reached a dramatic deal on Saturday as China, the United States agree to avoid “currency war” and to refrain from having too much trade surplus or deficit.
They also settled on a 6-percent shift of voting quota at the International Monetary Fund (IMF) by 2012 to emerging economies, with China emerging as the third largest voting power after the United States and Japan.
In a joint statement, finance ministers and central bankers of the G20 said that they will “move towards more market-determined exchange rate systems” and “refrain from competitive devaluation of currencies.” This phrase means that China has agreed to make its foreign exchange regime more flexible to the market, G20 officials said.
The G20 also agreed to have the IMF to set an “indicative guideline” of current account balance for each nation. This is intended as a solution to fix the global imbalance of growth and wealth accumulation without directly mentioning the exchange rate issue.
“This will put an end to the exchange rate debate,” said Yoon Jeung-hyun, South Korea’s minister of Strategy and Finance, in his closing press briefing at Hyundai Hotel in the historic city of Gyeongju.
The participants in general sounded content with the outcome as they emerged into the pressroom, though they looked tired after two days of continous group meetings and behind-the-scene bilateral talks.
“It was a very dramatic ending. Until yesterday, I thought we might not be able to forge an agreement,” a South Korean official said on the condition of anonymity. “I want to give my gratitude to all G20 countries, but especially to China. They made a great deal of concession. I sense that China is beginning to take a big turn in its economic policy.”
Satisfaction was heard everywhere. Dominique Strauss-Kahn, the IMF managing director, told reporters that it is a “historic agreement.” Christian Noyer, governor of the Bank of France, told the Korea Times that he is "extremely satisfied" with the result and everyone "should be all satisfied."
Skeptics have worried that the Gyeongju ministers’ meeting and the following Seoul Summit in November would be marred by the recent development of the so-called “currency war,” in which countries race to devalue their currencies against one another in order to take competitive advantage in international trade. The United States and Brazil were the most outspoken in blaming on other countries’ exchange rate policies for their economic woes.
The drama emerged onto the public realm on Friday. First, it was found out that both the finance minister and central bank governor of Brazil did not come to the meeting for unknown reasons. Then in the afternoon, a letter sent from Timothy Geithner, the U.S. Secretary of Treasury, to other G20 countries was leaked to reporters.
In the leaked letter, Geithner urged countries to set a specific target on each nation’s current account surplus or deficit in proportion to its GDP _ a Plan B for fixing the global imbalance problem.
The result was a brief chaos inside the pressroom. Ministers of Germany, Japan and Russia respectively called up reporters on Saturday evening and said “no” to the cap system.
The next morning, Geithner appeared with a softened version of the proposal with the term “target” being replaced by a more flexible expression of “indicative guideline.” This time, all nations agreed, a G20 official said.
Geithner might feel that he was unfairly treated _ it was later explained by Yoon Jeung-hyun, the South Korean minister, that the 4-percent cap on current account was actually initiated by South Korea, not by the United States.
Another Korean official said that the G20 negotiating table turned suddenly hostile when the letter was found to be leaked to the press. “I don’t want to name this mole, but this person made it really tough for us to go on,” he said.
Peer pressure
While China apparently made concession over its foreign exchange policy direction, it was rich countries of Europe that took a step back in the equally thorny issue of the IMF governance reform.
European nations agreed to hand over two seats in its executive board to emerging countries. They will also hand over about 3 percent of voting shares to emerging countries, while another 3 percent come from over-represented emerging countries such as Saudi Arabia, officials said.
As a result, China will climb six steps to become the third largest power in the IMF after the United States and Japan. Korea will gain two steps to 16th. The United States will lose some of its shares but it will still remain as the only country to have more than 15 percent of votes, a minimum required for a veto.
The shift will make the IMF look more legitimate. Its top 10 shareholders will be comprised of the United States, Japan, four European countries and the BRICs _ Brazil, Russia, India and China.
There has been speculation of a big deal in which China and Western countries exchanged favors over the IMF reform and the “currency war.” But officials denied existence of such bargaining.
“There couldn’t be a big deal, because each agenda has different interest parties. In case of the IMF reform, it’s mostly the United States versus Europe. For the currency debate, it’s mainly between China and the United States. Even the European countries have conflicting interests among themselves,” he said.
The G20 has three weeks to go until Seoul Summit, where details of Saturday’s joint statement will be fixed and endorsed by national leaders. As the agreements made at the G20 meetings are not legally or systemically binding, they will have to rely on the leaders’ mutual trust and peer pressure.
“It is not a legal document. It is rather a diplomatic code, a gentlemen’s agreement,” one official said, adding that he is optimistic about the implementation of the promises made in the joint statement.
Despite its achievements, Saturday’s agreement still leaves many concerns in the global economy untouched, such as how to deal with the growing public debt of the United States, the world’s largest economy, and whether to make the G20 a more permanent institute.
There was also no discussion in Gyeongju on the decreasing clout of the U.S. dollar in the global economy. France, as the chair of the G20, will take on the issue of the global monetary system reform next year.
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