The world's dominant economies on Saturday struck a watered down deal on how to smooth out trade and currency imbalances many say exacerbated the financial crisis, but the difficulty in getting vastly different economies like China and the United States on the same page doesn't bode well for the Group of 20 rich and developing countries as a forum for global decision making.
G-20 finance ministers and central bankers meeting in Paris agreed on a list of technical indicators to track those imbalances — caused by some countries consuming more while others tend to hold on to their money — but left the more tricky questions of when those imbalances actually become dangerous and what to do to mitigate them for later.
French Finance Minister Christine Lagarde, whose country holds the G-20 presidency this year, said the all-night talks had been "tense" at times, indicating the clash in national interests between countries that find themselves on completely divergent growth trajectories after the 2008 financial crisis that plunged the world into its worst economic recession in 70 years.
The result was a "balanced compromise (that) doesn't stigmatize any one country," Lagarde told journalists.
The G-20 itself is a recognition of the rise to power of nations such as India, China and Brazil, having supplanted smaller forums like the G-7 and G-8 during the climax of the financial crisis, when it achieved its biggest successes.
But since then — with some countries growing at an almost unprecedented pace while others still in the through of recession — the G-20 has lost much of its swagger.
"What I was worried about — I'm sorry to say — materialized: which is that it's more difficult than it was before to have people agree," Dominique Strauss-Kahn, the managing director of the International Monetary Fund said of Saturday's compromise. "When they were really scared, they were happy to find a consensus. Now ... many believe — wrongly — the crisis is behind us and they have domestic concerns."
At the heart of the debate about imbalances is the realization that a decades-long global economic order centered on the U.S. buying exports from the rest of the world and running huge trade deficits, while countries such as China and Germany accumulate vast surpluses is no longer tenable.
In the years before the meltdown, countries with trade surpluses plowed money into mortgage and other investments in the United States, driving up their value and exacerbating the crash when the bubble eventually burst.
But the opaque language of Saturday's deal shows the challenge of moving beyond that basic recognition.
China's large current account surplus, a measure of trade and capital flows in and out of a country, made it reluctant to include that as one of the G-20's indicators for imbalances. Compromise wording was agreed on making that measurement a mix of current account balance — the indicator most countries wanted — and trade balance — the yardstick China had been pushing for.
The valuation of national currencies — long a sticking point in Chinese-U.S. relations — did not survive as a separate indicator, but will be considered as part of the broader analysis of capital flows. That saved Beijing from even more direct pressure to let its currency — the yuan — rise more quickly against the dollar. The U.S. complains that the artificially low value of the yuan gives Chinese exports an unfair advantage.
Foreign currency reserves — the largest of which are also held by China — were dropped all together, although some officials insisted they survived under the oblique heading of "other policies."
Lagarde touted the very fact that the words "exchange rate" were even mentioned on the list as a success. The indicators also include more traditional yardsticks such as public debts and deficits and private debt levels and savings rates.
With agreement on what to track, work will now begin on the more difficult task of setting what the G-20 calls "indicative guidelines" against which to measure each of the criteria. Lagarde said the goal is to agree on this at the next G-20 finance ministers meeting in Washington in April.
Asked whether deciding the list of indicators presaged even more divisive talks over thresholds and enforcement, Lagarde said "I take things one day at a time. If it is difficult, it will be difficult."
While some analysts said the compromise on imbalances was a natural result of slow international decision making, others warned that an agreement on a list of indicators didn't mean much for rebalancing the global economy.
Saturday's deal is "totally irrelevant," said Charles Wyplosz, professor of international economics at the Graduate Institute in Geneva. "Everybody knows what is the exchange rate of China and the current account of Germany."
Enforcing any eventual agreement on firm thresholds will be even harder. "What we're down to is peer pressure..., which has never ever worked," Wyplosz said.
The main purpose of the G-20 may now be moving governments closer to understanding each others' position and prevent them from more disruptive behavior such as trade protectionism, he said.
"You know what you have to do to not upset your neighbors and if you talk to your neighbor it's easier not to upset him too much," he said.
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