Both before and after the Seoul summit, the major economic powers were struggling to find common ground on the nature of what they agreed were much needed reforms. Such a meeting of the minds is necessary in order to lay down the basic pillars of a new global economic order. For the sake of keeping up appearances, the United States and France (which hosts the current meeting in Cannes) described the summit as the “first post-crisis G20.” However, if one tries to decipher this statement, it most certainly means that G20 members were unable to come to any accord on the roadmap laid out in London in April of 2009. This road map aimed to adopt appropriate measures to regulate the world financial system by going even further than the Basel III agreements (which require banks to keep a minimum capital base - their own funds - of 7 percent rather than the previous of 2 percent).
But it has to be said that extenuating circumstances exist for the G20 members to procrastinate on a roadmap agreement. The contentious “currency war” is one of them. Just as the budget deficit crisis had contaminated the debate among G20 members in Toronto, the currency war became the focus of attention during the discussions held in Seoul. Should we therefore conclude that this currency war is more urgent, more vital to the global economy than regulating the financial system? Is the currency war going again to overshadow other crucial issues facing the international economic system in Cannes?
Two fundamental economic policy issues are raised in answering these questions. First, it would be unwise to create of a hierarchy of issues, as all the problems facing the G20 are closely related and intertwined. The currency war is linked with what economists call “competitive devaluation.” Devaluating a country’s currency through a period of “quantitative easing” (QE) is an unconventional monetary policy designed to make a country’s exports more attractive for potential importers. It is being adopted with increasing frequency. Its unilateral nature implies that the country concerned, for example the United States, expects to stimulate its economy by increasing its exports at the expense of the terms of trade of other countries – “beggar thy neighbor” – especially emerging economies, such as those of China, Brazil, India, etc. In reality, such an orientation of economic policy is equivalent to an admission that of fiscal policy and other efforts made in developed economies are failing (more than $1.5 trillion was spent on the “Stimulus Package” in the U.S. in 2009).
Monetary policy, another financial instrument available to states’ leaders, is far more difficult to successfully implement because it is in theory the prerogative of central banks, which usually operate as independent institutions with their policy making powers. However, by injecting $600 billion into the economy in the last two years, the U.S. Federal Reserve is helping defuse protectionist reflexes held in check during the first G20 meeting in Washington in 2008. Member states came out of this meeting with a written declaration to not revert to the use of protectionist policies. The refusal to seriously address currency war issues at the Seoul Summit sent the signal to policymakers that they were free to hammer out their own national economic policies without regard to the existing framework for international concerted action legitimized by the G20.
Secondly, the lack of consensus in Seoul further suggests that China and the United States are positioned to continue their currency war without being sanctioned for doing so by any international economic policeman. Also, by relinquishing a firmer control over capital flows, the International Monetary Fund bears indirect responsibility for the persistence of this seemingly never-ending “war.” In such an international financial landscape it is hardly surprising that China has allowed its currency to float, given the vast reserves it holds (in particular the purchase of U.S. debt in the form of T-bills).
On the other hand, giving up control and oversight, even partially, over financial transactions in a world financial system which is still unstable and often difficult to understand, even for the financial institutions themselves, is encouraging IMF members to follow the leader in a perilous dance of “competitive devaluation.”
In this currency war, the G20 had the opportunity in Seoul to establish its institutional legitimacy by reaching a compromise among its members rather than postponing the resolution of this issue yet again. It is somewhat naïve to think that either China or the United States will eventually compromise on competitive devaluation. By suggesting the United States to give in and adopt a less aggressive monetary policy and in return offering emerging countries the chance to substantially appreciate the value of their currencies the G20 could have gained credibility and reconfirmed its key role in a time of a deepening world crisis. In the final analysis, however, we will have to wait and see whether the Cannes Summit will demonstrate that the various G20 members have finally learned an important lesson and are now willing to take appropriate action for the collective goods.
Dr. Richard Rousseau is Associate Professor and Chairman of the Department of Political Science and International Relations at Khazar University in Baku, Azerbaijan and a contributor to Global Brief, World Affairs in the 21st Century (www.globalbrief.ca) and The Jamestown Foundation.
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Currency War: G20 Members Bury their Heads in the Sand
October 31, 2011
Both before and after the Seoul summit, the major economic powers were struggling to find common ground on the nature of what they agreed were much needed reforms. Such a meeting of the minds is necessary in order to lay down the basic pillars of a new global economic order. For the sake of keeping up appearances, the United States and France (which hosts the current meeting in Cannes) described the summit as the “first post-crisis G20.” However, if one tries to decipher this statement, it most certainly means that G20 members were unable to come to any accord on the roadmap laid out in London in April of 2009. This road map aimed to adopt appropriate measures to regulate the world financial system by going even further than the Basel III agreements (which require banks to keep a minimum capital base - their own funds - of 7 percent rather than the previous of 2 percent).
But it has to be said that extenuating circumstances exist for the G20 members to procrastinate on a roadmap agreement. The contentious “currency war” is one of them. Just as the budget deficit crisis had contaminated the debate among G20 members in Toronto, the currency war became the focus of attention during the discussions held in Seoul. Should we therefore conclude that this currency war is more urgent, more vital to the global economy than regulating the financial system? Is the currency war going again to overshadow other crucial issues facing the international economic system in Cannes?
Two fundamental economic policy issues are raised in answering these questions. First, it would be unwise to create of a hierarchy of issues, as all the problems facing the G20 are closely related and intertwined. The currency war is linked with what economists call “competitive devaluation.” Devaluating a country’s currency through a period of “quantitative easing” (QE) is an unconventional monetary policy designed to make a country’s exports more attractive for potential importers. It is being adopted with increasing frequency. Its unilateral nature implies that the country concerned, for example the United States, expects to stimulate its economy by increasing its exports at the expense of the terms of trade of other countries – “beggar thy neighbor” – especially emerging economies, such as those of China, Brazil, India, etc. In reality, such an orientation of economic policy is equivalent to an admission that of fiscal policy and other efforts made in developed economies are failing (more than $1.5 trillion was spent on the “Stimulus Package” in the U.S. in 2009).
Monetary policy, another financial instrument available to states’ leaders, is far more difficult to successfully implement because it is in theory the prerogative of central banks, which usually operate as independent institutions with their policy making powers. However, by injecting $600 billion into the economy in the last two years, the U.S. Federal Reserve is helping defuse protectionist reflexes held in check during the first G20 meeting in Washington in 2008. Member states came out of this meeting with a written declaration to not revert to the use of protectionist policies. The refusal to seriously address currency war issues at the Seoul Summit sent the signal to policymakers that they were free to hammer out their own national economic policies without regard to the existing framework for international concerted action legitimized by the G20.
Secondly, the lack of consensus in Seoul further suggests that China and the United States are positioned to continue their currency war without being sanctioned for doing so by any international economic policeman. Also, by relinquishing a firmer control over capital flows, the International Monetary Fund bears indirect responsibility for the persistence of this seemingly never-ending “war.” In such an international financial landscape it is hardly surprising that China has allowed its currency to float, given the vast reserves it holds (in particular the purchase of U.S. debt in the form of T-bills).
On the other hand, giving up control and oversight, even partially, over financial transactions in a world financial system which is still unstable and often difficult to understand, even for the financial institutions themselves, is encouraging IMF members to follow the leader in a perilous dance of “competitive devaluation.”
In this currency war, the G20 had the opportunity in Seoul to establish its institutional legitimacy by reaching a compromise among its members rather than postponing the resolution of this issue yet again. It is somewhat naïve to think that either China or the United States will eventually compromise on competitive devaluation. By suggesting the United States to give in and adopt a less aggressive monetary policy and in return offering emerging countries the chance to substantially appreciate the value of their currencies the G20 could have gained credibility and reconfirmed its key role in a time of a deepening world crisis. In the final analysis, however, we will have to wait and see whether the Cannes Summit will demonstrate that the various G20 members have finally learned an important lesson and are now willing to take appropriate action for the collective goods.
Dr. Richard Rousseau is Associate Professor and Chairman of the Department of Political Science and International Relations at Khazar University in Baku, Azerbaijan and a contributor to Global Brief, World Affairs in the 21st Century (www.globalbrief.ca) and The Jamestown Foundation.
