Wednesday, February 23, 2011

G20 progress, or lack thereof

The challenging thing about commitments made on behalf of the world’s largest economies at G20 forums was always going to be the extent to which those commitments translated into policy actions at home. The intentions are in the right place. A stronger global economy needs a co-ordinated approach to tackle structural global imbalances and to determine the future look and feel of the international monetary system.

The communiqué from the Paris meeting of G20 finance ministers was full of good intentions, but the multi-clause sentences belie the difficulty of committing to a firm course of action. As each clause was added to appease the various G20 members, the sentences became less meaningful, and less committed to a course of action.

It will, for example, be difficult to fix global imbalances when consensus on how to measure them necessitates leaving out one critical element: foreign currency reserves, and a significant watering down of another, real effective exchange rates.

If you subscribe to the argument of the so-called “savings glut” as the genesis of the global financial crisis, then high foreign reserves, predominantly in emerging markets, were at the heart of the crisis. And monitoring of exchange rates was replaced in the communiqué with a far broader and therefore softer commitment to “take due consideration of exchange rate, fiscal, monetary and other policies”.

Progress is being made, but it is at a snail’s pace, but at least critically important issues are being discussed. At some point, meaningful progress needs to be made. One of our fears in the aftermath of the recession was a return to Great Depression style competitive devaluation protectionist policies. This must be avoided and it seems to me the best way to do so is for each of the G20 to walk the talk that is being delivered on the global stage.

To be fair to the G20, some of the critics need to have a bit of a think about the consistency of their arguments. China comes in for the most heavy criticism, but if one is to be consistent, Germany should wear a bit at well. China isn’t the only large surplus country that needs to rebalance away from tradebales to non-tradeables.

Financial reform seems the best place for some early G20 wins. Some good work has been done on bringing international accounting standards into line and they must continue to push for the adoption of the Basel III banking standards.

Another issue that needs more discussion is the potential use of IMF Special Drawing Rights (SDRs) as a global currency at the heart of a stronger international monetary system. For that to happen the composition of SDRs needs to be reconsidered in the light of the growing global importance of the Chinese economy. The Yuan must have an allocation for SDRs to be in any way meaningful. But for that to happen, the Yuan would have to become a freely convertible currency. Is that a carrot I see dangling?