G20 leaders closed ranks today and agreed to a watered-down commitment to watch out for dangerous imbalances, yet offered investors little proof that the world was any safer from economic catastrophe.
After an acrimonious start, the developed and emerging nations agreed at a summit in Seoul to set vague “indicative guidelines” for measuring imbalances between their multi-speed economies but, calling a timeout to let tempers cool, left the details to be discussed in the first half of next year.
European leaders broke away for their own mini gathering in the middle of the summit to discuss a deepening credit crisis in Ireland, a stark reminder that the consequences of the worst financial crisis since the Great Depression still posed a serious threat to global stability. In a communique signed off at the end of the gathering, the group’s fifth since the financial crisis exploded in 2008, there was a little something for everyone.
Leaders vowed to move toward market-determined exchange rates, a reference to China’s tightly managed yuan that the United States has long complained is undervalued. They pledged to shun competitive devaluations, a line addressing other countries’ concern that the US Federal Reserve’s easy-money policy was aimed at weakening the dollar.
In a nod to emerging markets struggling to contain huge capital inflows, the G20 gave the okay to impose “carefully designed” control measures. They also agreed that there was a critical, but narrow, window of opportunity to conclude the long-elusive Doha round of trade liberalization talks launched in 2001.
But there was no mention of Ireland, and the bland promises to deal with imbalances did not appear substantive enough to bring about any real shift. The International Monetary Fund warned that gaps between cash-rich exporters and debt-laden importers was widening to pre-crisis levels. “The work that we do here is not always going to seem dramatic,” US President Barack Obama told a news conference after the summit.
“It’s not always going to be immediately world-changing. But step by step what we’re doing is building stronger international mechanisms and institutions that will help stabilize the economy, ensure economic growth and reduce some tensions.” Global financial markets were not moved by the outcome of the G20 summit as it offered few concrete measures to change economic policy. Investors were instead focused on the fiscal crisis in Ireland.
After weeks of verbal jousting, the United States and China sought to bury the hatchet over rows about China’s “undervalued” currency and the global risks created by the U.S. printing money to reflate its struggling economy. “Exchange rates must reflect economic realities … Emerging economies need to allow for currencies that are market driven,” Obama said. “This is something that I raised with President Hu (Jintao) of China and we will closely watch the appreciation of China’s currency.”
The G20’s accord sought to recapture the unity that was forged in crisis two years ago, but deep divides meant the leaders could not venture much beyond what was already agreed by their finance ministers last month. Negotiators had labored until the early hours of the morning to thrash out an agreement their leaders could all endorse, despite sharp disagreements that were on public display in the days before the meeting. “This hasn’t been a love-fest,” an official who participated in the negotiations said.
In particular, the leaders were unable to reach a consensus on how to identify when global imbalances pose a threat to economic stability, merely committing themselves to a discussion of a range of indicators in the first half of 2011. Tim Condon, head of research at ING Financial Markets in Singapore said it was “hard to disagree” with the vows of the leaders but they had fallen short of the progress hoped for going into the summit. “They decided just to put down a lot of laudable objectives as the conclusion of the meeting and hope that they can do better, that more can be accomplished in future meetings,” he said.
The G20 has fragmented since a synchronized global recession gave way to a multi-speed recovery. Slow-growing advanced economies have kept interest rates at record lows to try to kickstart growth, while big emerging markets have come roaring back so fast that many are worried about overheating. “G20 credibility does depend on showing results … we cannot get out of this with beggar-thy-neighbor policies,” Canadian Prime Minister Stephen Harper said. “We need instead to continue to coordinate our actions going forward. The recovery is fragile.”
“I don’t think the fact that we aren’t there yet, we haven’t resolved all these problems, means we will fall back.”