Research & Publications


The Global Rebalancing Game

16 November 2010

“More a G20 of debate than a G20 of conclusion,” this is how the meeting of the leaders of the world’s biggest economies on 11-12 November in Seoul was described by Dominique Strauss-Kahn, the International Monetary Fund’s managing director (Financial Times). While there are many pressing challenges concerning the exchange rate policy and global macroeconomic imbalances, the outcome of the summit was vague and imprecise.  Expectations for a successful and conclusive outcome were low in view of the mounting tensions and finger-pointing leading to the Seoul meeting.

The US Federal Reserve’s decision to spend $600bn on Treasury bonds (the so-called quantitative easing intended to keep interest rates low and encourage demand) had provoked a wave of strong criticism from most G20 countries. This is clearly an issue where the stakes are very high for the EU. The Fed’s decision to inject the money into the economy will lead to a weaker dollar, which, many say, will inevitably result in the appreciation of the euro. Given that the recent export-led recovery in parts of the eurozone has been fuelled by a relatively weak euro, this would account for the strong criticisms coming from Germany. The feeling of a looming “currency war” was only tempered by a G20 statement calling on countries to refrain from “competitive devaluation” and urging them to move “towards more market-determined exchange-rate systems, enhancing exchange-rate flexibility to reflect underlying economic fundamentals” (Leaders’ Statement).

Regarding the imbalances between countries with huge trade surpluses and deficits, the G20 communiqué reaffirmed that “uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions”. And yet, there was very little agreed how to overcome this, showing that G20 faces a classic collective action problem. While there is a broad agreement about what should be done to achieve more balanced global economy, there are no specific policies, timetable, enforcement mechanisms or measurable targets.

The US proposed before the meeting that countries should commit themselves to keeping current-account imbalances below 4%. Aimed mainly at China (with surplus of almost 4.7%), as a part of the US attempts to convince Chinese to appreciate the renminbi, the proposal would also concern Germany who has a 6% surplus, according to IMF. Mr Schäuble did not spare words in defending German export-oriented model: “The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies (…) There are many reasons for America’s problems, but they don’t include German export surpluses” (Spiegel Online). So the American proposal was shelved, with the Seoul communiqué opting for a vague mention of “indicative guidelines of a range of indications” to be agreed next year.

All these unresolved problems will continue to haunt the French Presidency, which took the reins from the Korean. France still hopes to build “more stable and more resistant” currency system that would help to solve the global macroeconomic imbalances. French President Sarkozy said: “When France first spoke about a new Bretton Woods (…) we were seen as oddballs. Today, the whole G20 and the rest of the world reckon that we should look at improving the international currency system” (Financial Times).

To “show” that they have agreed on something, the G20 leaders used the occasion to pre-announce the rearrangement of IMF voting powers.  More than 6% of voting power will be transferred to under-represented countries, and the EU countries will give up two of their eight seats on the 24-member board. China will now become the third-biggest member in the IMF behind the US and Japan.  They also endorsed the new Basel III standards on bank capital and liquidity, as well as stressed that next year was a “window of opportunity” to complete the Doha round.  A “Seoul consensus for shared growth” was also adopted to signal the change of the neo-liberal free-market Washington consensus to one that focuses on “inclusive, sustainable and resilient growth” (Leaders’ Statement).

In the meanwhile, the EU leaders present at the meeting had to convene a meeting to revisit the sovereign debt crisis, as Irish government bonds plunged to record highs (reaching levels of Greek debt just before Athens was bailed out earlier this year), raising fears that Dublin would be forced to restructure its debt. While Ireland has not asked for financial help, the EU leaders have expressed readiness to accommodate such request. “We have all the necessary instruments in place now to support Ireland if necessary,” said José Manuel Barroso, the President of the European Commission (EUobserver). The situation is also worrying in Portugal, whose finance minister Fernando Teixeira dos Santos warned of a possible contagion. Moreover, Greek debt has been found to be much higher than expected (15.4% of GDP instead of 13.6%, which is the highest ratio in the EU). This is a clear reminder that the EU is still not out of the woods with regards to its sovereign debt crisis.

Sources and links to further information:

Official documents