PREVIEW - G20 to launch drive to rebalance world economy
Tue Nov 3, 2009 10:10pm IST By Brian Love
PARIS (Reuters) - Six weeks after world leaders vowed to rebalance the global economy, finance officials are set this weekend to struggle with the complex, politically sensitive process of building a mechanism to achieve that goal.
Longstanding disagreements over policy -- particularly China's refusal to be rushed into appreciating its currency -- mean that for now, countries are unlikely to decide on specific steps to narrow yawning trade and savings gaps between them.
Instead, finance ministers and central bankers of the Group of 20 nations, meeting in St. Andrews, Scotland on Nov. 6-7, will try to flesh out a commitment to subject national policies to international scrutiny and peer pressure in years ahead.
"At St. Andrews they can elaborate their leaders' framework, identify principles and a process, and assess how fast and where China is prepared to move first, and what it wants in return," said John Kirton, a professor who studies the G20 at the University of Toronto.
At their September summit in Pittsburgh, G20 leaders announced they would by November launch "a cooperative process of mutual assessment" of national economic policies and their impact on global growth.
This could eventually mean a sea change in policymaking, as countries coordinated their policies to avoid the economic stresses which contributed to the global financial crisis.
To cut trade gaps, export giants such as China, Japan and Germany would be required to promote domestic consumption and rely less on foreign demand. Countries with big trade deficits, principally the United States, would boost their savings rates.
CURRENCIES
But a deadlock among G20 countries over exchange rates, which could have a big effect in rebalancing trade, shows how hard it will be for the group to move ahead.
China allowed the yuan to rise gradually for a few years after 2005 but has kept it essentially flat against the dollar since the financial crisis worsened in mid-2008.
It has resisted making any specific commitment to resuming appreciation, to the point where the G20 summit in Pittsburgh largely dodged the issue, merely issuing a vague call for "market oriented exchange rates that reflect underlying economic fundamentals". The signs are that the outcome of this month's G20 meeting will be no different. A Chinese trade official said last week that China would not permit a big move of the yuan until its exports had recovered significantly; some analysts interpret that to mean early next year.
Europe and Japan have shown more tolerance to let their currencies strengthen; French central bank chief Christian Noyer suggested this week the euro zone could live with the pain if euro appreciation did not accelerate. The euro was "only slightly above its long-term average", he said.
But countries do not want to be seen as encouraging appreciation, even if that would cut imbalances. Yoshihiko Noda, due to stand in for Japanese Finance Minister Hirohisa Fujii at St. Andrews, told Reuters last week that countries should avoid competing to weaken currencies, but this did not necessarily mean Tokyo accepted a strong yen .
So there is likely to be little appetite to discuss currencies at St. Andrews in other than general terms. Canadian Finance Minister Jim Flaherty said on Monday it was customary for the G20 to debate issues such as dollar weakness and the inflexibility of Asian currencies, but several G20 sources said they would not be big topics at the meeting.
NO NUMERICAL TARGETS
Without agreements on key issues such as currencies, the G20 is unlikely to feel able to commit itself to specific targets for rebalancing.
Britain, holder of the G20's rotating presidency, is keen to use medium-term targets for global economic growth as a starting point for discussing each country's policy options. But it could take months or years to agree on other numbers.
"We will reaffirm the need to share a common policy goal but won't come up with numerical targets," said one G20 official, who spoke on condition of anonymity.
"Each country needs to set medium-term (five-year) policy goals which should be consistent with each other. We could use figures such as growth rate, balance of payments, budget deficits, (and) employment here, but there's no consensus over what could be used as a common format."
Much of the talks in St. Andrews may therefore focus on the role of the International Monetary Fund, which the G20 wants to act as a global referee during the rebalancing process.
"Giving the IMF a stronger mandate to oversee G20 countries' macroeconomic policies was a step in the right direction," said Cornell University professor Eswar Prasad, an ex-IMF official.
"The finance ministers need to develop an enforcement mechanism to make their commitments more credible. Otherwise, stricter surveillance by the IMF will have no bite and the large economies will continue to play the game by their own rules."
The St. Andrews meeting may discuss the IMF's technical ability to monitor the global economy, and the extent to which it can make judgements independently without being influenced by member nations.
But there are still differences of opinion within the G20 over how the IMF's resources should be expanded and how voting power in the fund, traditionally dominated by the United States and other rich countries, should be redistributed towards China and the developing world.
Until these issues are cleared up, which could take many months, the IMF may not be able to operate decisively.
One of the biggest imbalances in the world economy, the U.S. current account deficit, is shrinking. It has dropped from a peak of over 6 percent of Gross Domestic Product to 2.8 percent in the second quarter of this year, its lowest level since the fourth quarter of 2001.
But analysts say the fall is essentially cyclical and due to the U.S. economic slump. The U.S. economy returned to growth in the third quarter after four quarters of contraction.
"There is every reason to believe imbalances will recur once the U.S. recovers," said UniCredit bank chief economist Marco Annunziata.
(Editing by Andrew Torchia)
Thomson Reuters 2009 All rights reserved
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Tue Nov 3, 2009 10:10pm IST By Brian Love
PARIS (Reuters) - Six weeks after world leaders vowed to rebalance the global economy, finance officials are set this weekend to struggle with the complex, politically sensitive process of building a mechanism to achieve that goal.
Longstanding disagreements over policy -- particularly China's refusal to be rushed into appreciating its currency -- mean that for now, countries are unlikely to decide on specific steps to narrow yawning trade and savings gaps between them.
Instead, finance ministers and central bankers of the Group of 20 nations, meeting in St. Andrews, Scotland on Nov. 6-7, will try to flesh out a commitment to subject national policies to international scrutiny and peer pressure in years ahead.
"At St. Andrews they can elaborate their leaders' framework, identify principles and a process, and assess how fast and where China is prepared to move first, and what it wants in return," said John Kirton, a professor who studies the G20 at the University of Toronto.
At their September summit in Pittsburgh, G20 leaders announced they would by November launch "a cooperative process of mutual assessment" of national economic policies and their impact on global growth.
This could eventually mean a sea change in policymaking, as countries coordinated their policies to avoid the economic stresses which contributed to the global financial crisis.
To cut trade gaps, export giants such as China, Japan and Germany would be required to promote domestic consumption and rely less on foreign demand. Countries with big trade deficits, principally the United States, would boost their savings rates.
CURRENCIES
But a deadlock among G20 countries over exchange rates, which could have a big effect in rebalancing trade, shows how hard it will be for the group to move ahead.
China allowed the yuan to rise gradually for a few years after 2005 but has kept it essentially flat against the dollar since the financial crisis worsened in mid-2008.
It has resisted making any specific commitment to resuming appreciation, to the point where the G20 summit in Pittsburgh largely dodged the issue, merely issuing a vague call for "market oriented exchange rates that reflect underlying economic fundamentals". The signs are that the outcome of this month's G20 meeting will be no different. A Chinese trade official said last week that China would not permit a big move of the yuan until its exports had recovered significantly; some analysts interpret that to mean early next year.
Europe and Japan have shown more tolerance to let their currencies strengthen; French central bank chief Christian Noyer suggested this week the euro zone could live with the pain if euro appreciation did not accelerate. The euro was "only slightly above its long-term average", he said.
But countries do not want to be seen as encouraging appreciation, even if that would cut imbalances. Yoshihiko Noda, due to stand in for Japanese Finance Minister Hirohisa Fujii at St. Andrews, told Reuters last week that countries should avoid competing to weaken currencies, but this did not necessarily mean Tokyo accepted a strong yen .
So there is likely to be little appetite to discuss currencies at St. Andrews in other than general terms. Canadian Finance Minister Jim Flaherty said on Monday it was customary for the G20 to debate issues such as dollar weakness and the inflexibility of Asian currencies, but several G20 sources said they would not be big topics at the meeting.
NO NUMERICAL TARGETS
Without agreements on key issues such as currencies, the G20 is unlikely to feel able to commit itself to specific targets for rebalancing.
Britain, holder of the G20's rotating presidency, is keen to use medium-term targets for global economic growth as a starting point for discussing each country's policy options. But it could take months or years to agree on other numbers.
"We will reaffirm the need to share a common policy goal but won't come up with numerical targets," said one G20 official, who spoke on condition of anonymity.
"Each country needs to set medium-term (five-year) policy goals which should be consistent with each other. We could use figures such as growth rate, balance of payments, budget deficits, (and) employment here, but there's no consensus over what could be used as a common format."
Much of the talks in St. Andrews may therefore focus on the role of the International Monetary Fund, which the G20 wants to act as a global referee during the rebalancing process.
"Giving the IMF a stronger mandate to oversee G20 countries' macroeconomic policies was a step in the right direction," said Cornell University professor Eswar Prasad, an ex-IMF official.
"The finance ministers need to develop an enforcement mechanism to make their commitments more credible. Otherwise, stricter surveillance by the IMF will have no bite and the large economies will continue to play the game by their own rules."
The St. Andrews meeting may discuss the IMF's technical ability to monitor the global economy, and the extent to which it can make judgements independently without being influenced by member nations.
But there are still differences of opinion within the G20 over how the IMF's resources should be expanded and how voting power in the fund, traditionally dominated by the United States and other rich countries, should be redistributed towards China and the developing world.
Until these issues are cleared up, which could take many months, the IMF may not be able to operate decisively.
One of the biggest imbalances in the world economy, the U.S. current account deficit, is shrinking. It has dropped from a peak of over 6 percent of Gross Domestic Product to 2.8 percent in the second quarter of this year, its lowest level since the fourth quarter of 2001.
But analysts say the fall is essentially cyclical and due to the U.S. economic slump. The U.S. economy returned to growth in the third quarter after four quarters of contraction.
"There is every reason to believe imbalances will recur once the U.S. recovers," said UniCredit bank chief economist Marco Annunziata.
(Editing by Andrew Torchia)
Thomson Reuters 2009 All rights reservedhttp://in.reuters.com/article/busine...ssNews&sp=true
http://in.reuters.com/article/busine...ssNews&sp=true