World Critical of American Monetary Policy

From Europe to Russia to China, countries fiercely criticize the American Federal Reserve for its expansionary policy.

Countries around have criticized the Federal Reserve for its expansionary policy. Last week, the American central bank announced another multibillion dollar capital injection in the hope that it might increase liquidity in the financial system and encourage banks to ease their lending to private enterprise. Other nations believe that it amounts to a veiled attempt at driving down the exchange rate of the dollar.

The Fed plans to buy $600 billion worth of Treasury bonds over the next eight months with the aim of keeping long-term interest rates low and promote the now almost moribund recovery of the American economy. Unemployment rates in the country continue to hover around 10 percent while some of its antiquated industries are struggling to compete with companies in China, Germany and low wage countries across East and South Asia. Inflation rates have remained modest at 1.2 percent but may well increase as a result of the Federal Reserve’s second round of quantitative easing.

American treasury secretary Timothy Geithner previously blamed China and Germany for relying too much on exports to the United States. “For too long many countries oriented their economies toward producing for export,” he said last month, “rather than consuming at home — counting on the United States to import more of their goods and services than they bought of ours.” China has also come under fierce American criticism for keeping its currency undervalued which helps Chinese exporters prosper — at the cost of American competitors, according to Washington.

These both countries have been quick to blame the Americans in turn for their monetary policy. Germany sees the Fed’s move as an attempt to put it on the defense at the upcoming G20 summit in Seoul, South Korea later this week. The German finance minister, Wolfgang Schäuble, described the decision as “clueless”. “They have already pumped endless amounts of money into the economy with extremely high budget deficits,” he added. “The results have been hopeless.”

China’s vice finance minister, Zhu Guangyao, reiterated Chinese objections Monday, charging that the Fed’s latest move “did not recognize its responsibility to stabilize global markets.” Nor, he said, did the bank “think about the impact of excessive liquidity on emerging markets.”

The reason China won’t compromise on currency is the very real fear of its leadership that any slowdown in economic development risks unleashing internal forces of discontent and threaten Communist Party rule. That fear is not without reason. Unrest in the southwestern provinces of Xinjiang and Tibet continues in spite of sometimes violent attempts at oppression. Tens of thousands of protests take place across the country each year. Even in the fast growing cities along the eastern seaboard, discontent with the lack of political freedom is mounting.

With China and the United States so hopelessly deadlocked, it is little wonder that other G20 countries are worried. Brazil’s finance minister previously warned of a “currency war” among nations while South Africa’s Pravin Gordhan predicted this week that the Fed’s unilateral decision to expand the money supply could “undermine the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis.” Russia added that the G20 should have been consulted before such a major policy were enacted.

The European Central Bank, a proponent of austerity, has refrained from commenting on the Fed’s latest decision out of courtesy but it is pursuing a very different course. President Jean-Claude Trichet declined to inject new stimulus into the eurozone despite weak recovery figures in particularly the south of Europe.

Although Trichet said that he believed the Fed’s quantitative easing wasn’t aimed at depreciating the dollar, Prime Minister Jean-Claude Juncker of Luxembourg, who also heads the group of eurozone finance ministers, complained that the dollar was undervalued and the Fed stimulus bore “risks” for the world at large. “The dollar in relation to the euro is not at the level it should be,” he told a European parliamentary committee on Monday.

French Finance Minister Christine Lagarde agreed, noting that the Federal Reserve’s expansionary policy is putting upward pressure on the euro. “The euro bears the brunt of the move,” she said in an interview Thursday. “I am not making a judgment on the America quantitative easing,” she explained. “But it shows the imperative need to rethink the international monetary system and cooperation mechanisms.”

Despite such appeals to closer cooperation, the Fed’s decision to effectively pump another $600 billion into the American economy would seem to diminish the prospect of world leaders agreeing on a unified approach at the G20 in Seoul. The broader debate between stimulus versus austerity, which currently divides the United States and Europe, remains unresolved.