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Sunday, Nov. 14, 2010
Dilemma for the G20
The promise of the Group of 20 was a new system of global leadership that would be more representative of real economic power and, thus, more effective in decision making. The 2008 economic downturn thrust the G20 into the spotlight. The speed with which its participants found common cause and their readiness to initiate measures to deal with the crisis sparked hope of a new era of global economic governance.
As the crisis has lessened, so too has the sense of urgency to fix problems that created the worst economic downturn since the Great Depression. For sure, progress has been made in identifying weaknesses in how the global economy works as well as in remedying some structural flaws in economic governance. But, at times, the G20 seems no better suited than its predecessors to making hard decisions or putting substance behind its declarations.
At last week's G20 summit, hosted in Seoul by South Korean President Lee Myung Bak, participants agreed to curb the "persistently large imbalances" in consumption and savings. Tolerance for the steady and massive trade surpluses run by Germany and China, and for the corollary U.S. deficits, is the most important source of global economic instability.
Yet, most nations are prepared to let the United States live beyond its means since it provides a market for their exports. A more stable and balanced economy requires new sources of demand along with policy shifts that make the costs of the existing state of affairs more apparent and their impact more real. In other words, governments must halt the measures by which they insulate themselves from the effects of these imbalances.
For many, this means allowing currencies to move more freely to better reflect supply and demand. As countries rack up huge surpluses, their currency should climb in value as customers buy marks and renminbis to pay for their goodies. At the same time, the currency on the consumers' side should decline in value as it is sold on international markets. This makes imported goods more expensive, curbs demand and, in theory, creates stability. Interfering in markets to prevent currencies from reaching equilibrium and stability only puts off the eventual reckoning.
The G20 leaders understand the economic logic. Unfortunately, for them, like their counterparts in the G8 and other groups, there is a more pressing political imperative: keeping their own economies humming. That means, despite inspiring rhetoric about cooperation, they are not prepared to shoulder the costs of providing for the international public good.
So, at the G20 meeting, the leaders agreed only to develop "indicative guidelines" that would be used to determine what can be called an "imbalance" and to fix it. In short, they punted. As French President Nicholas Sarkozy, host of the next G20 summit, explained, "We don't have an agreement on what the criteria are, but we agree that there must be criteria."
This is a victory for China and Germany. The U.S. has been pressing for benchmarks on acceptable levels of deficits and surpluses — Treasury Secretary Timothy Geithner suggested 4 percent of GDP — but export-oriented governments, with Berlin and Beijing leading the way, rejected that idea.
The most optimistic assessment of the outcome is that there will now be more time to develop a consensus on a broad, multilateral framework to address imbalances. Pessimists say the likelihood of serious measures being taken to address problems will continue to decline in the absence of another crisis.
Currency adjustments are not a panacea. They will not remedy all the problems in the global economy. But exchange rates should dampen pressures for sudden shifts and shocks; currently they do not. Some will worry that the G20 actually endorsed controls on exchange rates when it acknowledged that sudden inflows can prove destabilizing. This refers to "certain circumstances." Governments are likely to apply that qualifier liberally.
As always in these situations, the danger is that governments will try self-help remedies that ultimately undermine other nations. The G20 statement concedes as much: "Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions."
At the moment, the immediate concern is competitive currency devaluations that aim to keep national exports cheaper but are more likely to trigger beggar-thy-neighbor policies. Many G20 nations believe the U.S. is doing just that, surreptitiously, in light of the Federal Reserve's decision to pump $600 billion into the U.S. financial system, an accusation that Mr. Geithner denies. The dollar's rise in value in recent weeks suggests he is telling the truth.
The irony is that the U.S. is acting to stimulate its economy and resuscitate flagging demand for foreign products. That contradiction goes to the heart of the dilemma the G20 faces. That the situation is paradoxical makes a solution no less compelling. In their statement, G20 leaders acknowledge their responsibility to act: "We hold ourselves accountable. What we promise, we will deliver." We are still waiting.