The G20: Is There Still Common Ground?

In the lead up to the Group of 20 Summit in South Korea this November, a global economy caught between recovery and stagnation seemed to be fostering a new type of indecision. The momentum behind policy coordination and consensus that characterized the G20’s first meetings was giving way to power struggles. As the heads of state of the world’s 20 leading nations convened in Seoul on Nov. 11, it was perhaps the finger pointing that best characterized the mood.

Currency wars and global imbalances had dominated the debate in the days leading up to the two-day affair. Nothing new in monetary policy discussions, but the deliberations had taken on new tensions following the Nov. 3 decision by the Federal Reserve to resume quantitative easing.

This policy, which involves printing excess dollars for the purpose of buying up government bonds, thus pushing interest rates down and weakening the dollar, has been met with resistance from countries such as Germany and China whose export-driven economies rely on running large trade surpluses. With a weaker dollar, the U.S. could gain an edge in export markets, hurting revenues in China and Germany. Emerging countries met their calls and accusations, fearing the flight of capital to their economies that results from such policies, which raise currencies and overheat fragile economies.

The U.S. countered accusations by voicing concerns of the low value of China’s currency and persistent imbalances. A U.S.-backed proposal to limit trade surpluses at 4% of GDP was put on the table with the hopes of restricting growth in excessive surpluses that make future crises imminent. Germany and China, the odd bedfellows of the meeting, did not hesitate to form a coalition to stop the proposal from gaining ground. All plans to set such limits were dropped. Calls for China to allow more freedom for its currency to fluctuate met the same fate, and all sides instead announced vague promises to tackle imbalances, with no clarity on how that would be realized.

In the aftermath of the meeting, member states refrained from acknowledging any lack of consensus. Germany’s Angela Merkel claimed that the two camps had reached "agreement," and insisted that the "spirit of cooperation had won." U.S. President Barack Obama, for his part, boasted of minor achievements:

"Instead of hitting home runs, sometimes we’re going to hit singles," he said at a press conference afterwards, adding, "but they’re really important singles." The G20, which had been instrumental in coordinating economic policies during the height of the crisis, now seemed to be encountering the stagnation and posturing so typical of large-scale intergovernmental summits.

To be fair, the bickering that preceded the meeting also overshadowed its accomplishments. The summit paved the way for the implementation of the Basel III regulations, which will require banks to maintain higher equity levels and thus prevent another taxpayer bailout in the case of another crisis. The IMF, which underwent a major overhaul after a previous G20 summit, is facing heightened pressure from the Group to adhere to governance restructuring plans laid out in 2009: quota reallocation will be enforced, allowing emerging economies to speak with a stronger voice in global monetary affairs, and Europe – historically the ruler of the IMF – will have to give up two seats on the Fund board.

The G20, acting as the IMF’s steering committee, continues to oversee reform of lending facilities that will give emerging states more cushion in times of crisis. These outcomes were, in fact, expected before the meeting, but nonetheless indicate a degree of accomplishment that hints at the G20’s resilience.

Still the lack of accord on a number of pressing issues constitute a failure, considering the stark imbalances that continue to plague the world economy. Systemic imbalances may pose a greater threat than G-20 leaders let on. The exorbitant U.S. current account deficit, the result of a disproportionate demand for dollar-denominated assets, has led to immense foreign exchange reserves that have risen from 5% of total global GDP in 1995 to 14% today, mostly held by emerging countries. This translates into poor countries lending to the rich (see China vs. the U.S.), and puts downward pressure on dollar interest rates, one of the culprits of the financial crisis that began in 2007. Rather than working towards an integrated economy that allows for natural realignments of exchange and interest rates, China continues a policy of blatant currency manipulation and capital controls, stockpiling foreign exchange reserves to keep its currency artificially low, thus keeping its exports attractive and fueling its already booming economy.

Imbalances are exacerbated by other emerging markets hoarding foreign exchange reserves. This policy became a defense mechanism; painful memories of the financial crisis of the late 1990s support the piling up of reserves, and the fact that countries that followed these practices fared better throughout the recent crisis gives them no reason to change course. China’s continued use of capital controls and currency manipulations serves as a poor role model for rising Asian economies that seek to compete in export markets. A sudden realignment could cause an economic calamity that would make the most recent crisis look pale.

Despite more important issues, it seemed that the only thing G20 members could agree on was the malevolence of the U.S. policy quantitative easing. The reasons for this seem clear in the case of China and Germany, which fear a threat to their export-driven growth. But the Fed’s decision may signal a last attempt to remedy a suffering U.S. economy, hoping to aid unemployment, now static at 9.6%, and increase demand that has remained sluggish since the financial meltdown of 2008. Printing money will reduce interest rates, encourage spending and boost exports with a lower exchange rate, which will benefit the U.S. and perhaps the world economy in the long run.

Injecting the planned $600 billion extra dollars in the economy brings threats as well, but with a gridlocked U.S. legislature, this may be the only choice left to American policymakers. And the U.S., for better or for worse, still acts as an engine behind global growth. In the absence of a strong America, China would have a much smaller market for its goods.

The meeting in Seoul was the fourth meeting for the G20 in half as many years, and the Group has been instrumental in combating the recent financial crisis that brought economies to a halt around the world. Representatives of G20 member states agreed to fiscal stimulus measures at the height of the crisis and, perhaps more notably, brought the IMF back from irrelevance by tripling its resources in the spring of 2009 (see VR May 2009 "The G20 Summit Adjourns"). But when the fallout subsided, so, it seemed, did the G20’s clout.

As France now assumes G20 leadership from South Korea, the world may have to brace for a different kind of Group. President Nicolas Sarkozy has already called for sweeping reform of the international monetary system, debates "without taboos," and possibly replacing the dollar with a new reserve currency. History has shown that such elaborate attempts to overhaul the monetary system usually end nowhere, dying before they ever took hold.

With the financial crisis retreating, the impetus for cooperation is less powerful than the desire for a competitive advantage. If the G20 can bring countries to the table in times of peace as well as crisis has yet to be seen.