2010 G20 Seoul Summit Preparations: A Blame Game Over Currency War?

Last week was held in Gyeongju, South Korea, the annual Meeting of the G-20 Finance Ministers and Central Bank Governors aimed at preparing the next month G20 summit that will be held in Seoul, Korea on 11-12 November 2010.

Although the official agenda was to discuss how to tackle the financial and economic crisis that spread across the globe in 2008 and ensuring global economic recovery with strong, sustainable, and balanced global growth, the meeting ended up being a “blame game” on currencies and exchange rate manipulation: The USA accusing China of administratively maintaining their currency low to boost exports … asking them to let markets set foreign-exchange values. Germany, through its Economy Minister Rainer Bruederle, criticising the USA’s monetary policy of indirectly manipulating the US dollar by printing out and issuing money in order to lift growth. Indeed, for Rainer Bruederle, and I quote: “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”  But the “blame game” did not end there. The USA hit back by diverting the focus from currency manipulation to countries’ current account imbalances. Indeed, for Timothy F. Geithner, the U.S. Treasury Secretary, the world economic & financial instability is not only due to currency manipulation but also to current account imbalances with some countries having excessive current account surpluses. The US treasury secretary went on by saying:  “We need to work to achieve more balance in the pattern of global growth … this requires a shift in growth strategies by countries that have traditionally run large trade and current account surpluses, away from export dependence and toward stronger domestic demand led growth.” . Clearly, this was deliberately directed to countries like Germany and China whose current account surpluses are respectively around 5% and 11% of GDP but the Germans stood up for themselves and fought back. The German Central Bank governor, Axel Weber, responded straight away and said: “Germany shouldn’t be blamed for having a current account surplus”. The German economic minister went one step further and even brought back the currency manipulation issue as according to him and I quote: “It’s the wrong way to try to prevent or solve problems by adding more liquidity,”. Timothy F. Geithner, the U.S. Treasury Secretary insisted however on his proposition for current account targets, calling for no more than 4% of GDP surpluses or deficits on current account…

With this proposal, the question that popped up immediately in my mind was to know the applicability of this. In other words, how would this work?

Well, in theory, when an economy has a current account surplus, its exchange rate should appreciate and thus make the exports expensive and the imports cheaper. This will in turn reduce the volume of exports, which will consequently balance the current account and also lead to the depreciation of the currency and the cycle will start again with the help of markets adjustment. Curiously, this is not happening with China. Indeed, China has a huge current account surplus (11% of GDP) but still manage to keep a very low currency… so my questions, would the 4 percent gap proposed by the USA help to adjust exchange rates? If yes, how? Would countries like China or Germany be forced to stop trading? And if so, how? Also, would it not be contrary to the USA’s criticism to China about setting values instead of letting markets adjusting values? What about developing countries or countries like Turkey that have current account deficits bigger than 4% of their GDP? Would they be punished?

Enough with the “blame game”! At least, by trading real goods, a country is not using artificial measures to maintain its economy …so let’s just be real, real and real. No more fiduciary money printed out for bailout, no more treasury bonds without real counterpart in the economy and no more living beyond our means and the world economy would be better.

Related Article:

GOLD STANDARD: YES OR NO?