The leaders of the world’s largest economies failed to reach agreement on balancing the global recovery in Seoul, South Korea this week. Net exporters as China and Germany were particularly resistant to proposals that would benefit deficit countries at their expense. The G20 also failed to resolve what some have dubbed the “currency war” between industrialized and developing nations.
In their formal declaration the G20 leaders nonetheless pledged to continue their “coordinated efforts and act together to generate strong, sustainable and balanced growth.” But just what “sustainable” means remains a matter of debate. The problematic task of defining the exact impediments to recovery have been delayed until next year, when France assumes the presidency of the G20. For the time being, the International Monetary Fund has been charged with monitoring current account imbalances, to warn if differences in trade flows become “unsustainable”.
French president Nicolas Sarkozy already announced to try to foster consensus however, noting that his intention is “not to stall talks on solutions that would be put on the table too early.” In recent weeks he has met with several of his fellow world leaders bilaterally, including Chinese president Hu Jintao in Paris last week, in anticipating of the French G20 presidency.
The leaders convened in Seoul further promised to move toward “more market determined exchange rate systems” while “refraining from competitive devaluation of currencies.” China has been doing precisely that but is unlikely, despite Western criticism, to move on currency. The decrease in exports it would probably cause, and the social effects of a consequent reduction in growth rates, could be disastrous, says Beijing. Instead, the Chinese point at the United States’ own expansionary monetary policy as an attempt to drive down the exchange rate of the dollar and help American exporters. Other countries have been similarly critical of the American Federal Reserve’s decision to inject another $600 billion into American financial markets last week.
Different countries have warned against such covert measures of protectionism, particularly Germany and the United Kingdom. British prime minister David Cameron vowed to fight trade barriers and “competitive devaluations” ahead of the G20 while Chancellor Angela Merkel characterized protectionism as the “greatest danger” to the world’s recovery in an interview with the Financial Times, adding, “we are still not taking enough steps to ensure genuinely free trade.”
In the aftermath of the crisis, countries as France and the United States have promoted domestic industries considerably, bailing out automakers and, in the case of France, conditioning such a bailout on a promise not to outsource jobs. Calls to “buy American” and criticism of allegedly “unfair” competition from China are heard increasingly louder in the United States despite President Barack Obama’s assurance that free trade will “create American jobs.” His administration’s failure to conclude the Korea-United States Free Trade Agreement in Seoul this week is not an encouraging sign however.
The president did recognize the mounting assertiveness of emerging powers as Brazil, India, Turkey and South Africa on the world stage. “That’s a healthy thing,” he declared. The IMF recently agreed to a power shift in order to grant these nations a greater stake in international decisionmaking. In their communiqué, the G20 leaders attested their commitment to “a modernized IMF that better reflects the changes in the world economy through greater representation of dynamic emerging markets and developing countries.”
The group also endorsed a timetable for the overhaul of financial regulation to ensure that taxpayers are never again left to foot the bill if banks “too big to fail” face bankruptcy.
Notably absent from the discussions was the debate on austerity versus stimulus in which the United States are increasingly isolated.
At the previous G20 summit in Toronto, Canada world leaders agreed to fiscal restraint over American objections. While the Obama Administration continues to favor deficit spending, Europe is experiencing deep budget cuts. Even the United Kingdom, which, like the United States, largely relied on domestic consumption for growth during the years preceding the crisis — consumption that was financed with a great amount of debt — is now reining in spending and reform its entitlement culture. In the United States, by contrast, President Obama’s own party recently rejected proposals to reform expensive welfare programs. American unemployment rates also remain high compared to the rest of the developed world.