G20 pledges to add $2 trillion to global economy

The largest global economies have pledged to install policies that will add $2 trillion to the world economy over the next five years.

Will G-20 Counter Power of Uncertainty?

By Alexander Mirtchev 

In 2009, G-20 leaders met in Pittsburgh and emerged with a mandate ‘to be the premier forum for international economic cooperation,' endowing the G-20 with a leading economic role on the global stage. It appeared at the time that the leaders of the G-20 had successfully defeated pessimism. However, the rising tide of global economic turmoil and problems ranging from sovereign indebtedness to consumption and saving imbalances have created a ‘perfect storm' that is far from abating.

Alexander Mirtchev

Likely new Eurogroup head wants to move on from crisis-fighting

(Reuters) - The man likely to head the Eurogroup of euro zone finance ministers told his colleagues on Monday he wanted to move on from simply fighting crises and focus on longer-term policies to cement fledgling confidence.

Canadian PM Harper says he fears greater global protectionism

NEW DELHI (Reuters) - A trend toward greater protectionism was pushing the world toward a prolonged recession, Canadian Prime Minister Stephen Harper said on Wednesday, although he added an economic catastrophe could be averted.

A loyal, multi-faceted partnership

A loyal and solid friendship unites our two countries. These precious ties, which we must maintain staunchly, were founded on a commonality of values based on an attachment shared by both our states to democracy, multilateralism, dialogue between civilisations, which requires a sustained policy of cultural exchanges.

The richness of this multi-faceted partnership is especially illustrated in the sector of sustainable development and transport.

G-20 ministers reach compromise deal to correct economic flaws

G20 finance ministers have reached a compromise deal to correct global economic imbalances and expressed concern over excessive commodity price volatility impacting the world food security, an issue pressed by India.

After two days of hard bargain by their finance ministers, major economies faced with uneven recovery and downside risks reached a text on guidelines for removal of structural flaws in the global economy.

Davos forum: China steps up amid global recovery

DAVOS, Switzerland

It may be time to stop referring to China, the world's second-biggest economy after the U.S., as an emerging nation and focus on creating jobs now that the global recovery appears to have gotten a toehold.

That's what top business leaders, politicians and social activists discussed, among other issues, on the first day of the World Economic Forum on Wednesday.

"There is a global economic recovery," said economist Nouriel Roubini, who gained renown for predicting the crisis of 2008 and a few months ago was still warning against the possibility of a "double dip recession." He noted that "balance sheets are strong, confidence is rising," credit spreads have fallen and liquidity -- the availability of credit -- has increased.

But he warned that in the U.S. and Europe, growth remained low and unemployment high. The U.S. still faced a real estate crisis and inspired little faith in its ability to tackle its deficit and debt, while in Europe markets have forced austerity measures that endanger growth. And in an allusion to China, Roubini said there was "not enough exchange rate adjustment" and warned this could lead to "currency wars and eventually trade wars and protectionism."

The 2,500 participants at this year's meeting have focused much of their concentrated expertise on China's growing clout, simmering anxieties about Europe's debt crisis and consideration of the possible aftershocks of the financial crisis that has wrought layoffs, cutbacks and austerity measures.

With China overtaking Japan as the world's No. 2 economy last year, and growth predicted to hold steady in the upper single digits this year, panelists questioned whether Beijing hasn't already arrived at the top table.

"We have to get out of the lexicon the words 'developing' or 'emerging,'" said Martin Sorrell, chief executive of advertising giant WPP Group.

China and India have both sent their biggest ever delegations to this year's forum, spearheaded by business leaders seeking to plant their flags on a world stage previously dominated by U.S. and European companies.

"In 10 years the economies of the emerging world will be in excess to $20 trillion , which is equal to the U.S. economy," noted Azim Premji, chairman of India's Wipro.

Zhu Min, former deputy governor of the Bank of China and now a special adviser to IMF Managing Director Dominique Strauss-Kahn, cautioned that the figures obscure huge expectations among the poorest in the developing world that cannot be met soon.

The theme of this year's meeting is "Shared Norms for the New Reality," and part of that includes the new economic reality, too, and the shift of jobs from West to East is on the minds of many.

"What is missing in the West is a ... sense of urgency" about unemployment, especially among young people whose skills aren't always what the fast-evolving labor market needs, said Arianna Huffington, the co-founder and editor in chief of The Huffington Post news website, at a panel on the future of employment.

The general consensus among the CEOs present was that the most promising job markets are in the East, and the West has no easy answers.

"In terms of quantitative growth, I don't think the West can do anything," said Lars Olofsson, CEO of retailer Carrefour SA, Europe's largest employer.

Philip Jennings, head of the UNI Global Union, urged an end to austerity programs and said the Group of 20 should do more to create jobs. "People have to wake up. G20, wake up."

"If I have to go to a group of workers and I say the future is in the East, there will be more Jasmine Revolutions by the day," he said, referring to the ouster of Tunisia's president this month after weeks of protests over joblessness and corruption.

Later Wednesday, the five-day meeting features a keynote address Wednesday evening by Russian President Dmitry Medvedev, who postponed his planned arrival by a day after a suicide bombing killed 35 people in the country's busiest airport amid lax security.

The topic of Medvedev's speech hasn't been shared, but given the intense security surrounding the meeting, and the fact that terrorism remains an issue of both political and commercial concern, his audience is expected to listen keenly to what Medvedev has to say.

Source: http://www.businessweek.com

Russia could take a major role in introducing an economic security council

Russia should take a step forward to modernize international institutions and should not hide behind the UN and the Security Council. New alliances are being formed and Russia should be a part of those new alliances. These are the new organizations for the new world of the 21st century.

Valdaiclub.com interview with Wolfgang Nowak, Managing Director and Spokesman for the Executive Board, Alfred Herrhausen Society for International Dialogue

At the international economic forum in Davos, Russian President Dmitry Medvedev will present a report on the modernization of the Russian economy and on cooperation with Russia’s foreign partners. Can you assess the work that the Russian government has done thus far to expedite modernization and technical development in its economy? What, in your opinion, is the current status of these strategic objectives, and what other steps must the government take to make its country more competitive in a global economy?

Well, I will say that Russia is still a world power in terms of energy production, and not yet a world power with all of its industries. And I think that Russia is in a good position, but Russia should continue to cooperate with Western companies and become an industrial world power because Russia will have to rely on its healthy economy once the energy is gone. But at the moment, Russia is still one of the most important –maybe the most important – and most reliable world power in energy. I can also say that modernization also requires a reliable legal system, and the rule of law is very important for companies that do business with Russia. It’s very important. But let me say in conclusion: Russia is a world power in energy and the entire country is really fit to become an industrial world power, but you have to have a better infrastructure, you have to have the rule of law, and you have to invite Western companies – and, as I’m German, invite German companies – to help you modernize the country and become a major power. The CEO of Deutsche Bank recently said that we should have an economic zone that includes Russia and Europe, and I think that it would be a very good idea to pursue this and not to turn away from the obstacles.

Is it possible, in your opinion, for Russia to achieve World Trade Organization accession over the next 3-4 months?

Well, I think it might be realistic to do this in the next four months, and I think that most of the gains that have been made have been psychological, and I hope that they finish this agreement in the next three to four months. And I think there are some obstacles that have nothing to do with the economy. Russia needs to be more visible, take on a more visible role in solving international conflicts. This doesn’t mean that Russia has to follow America, but Russia has to develop its own ideas to solve these questions and to look for partners. And if you remember, there was an odd situation at the last G20 summit: suddenly China depended on Germany, and China and Germany were on the same side, contradicting the United States. I think that new alliances are being formed and Russia should be a part of those new alliances.

Regulating and controlling the post-crisis global economy remains a major problem for the G20. Could you assess the progress of the G20 on these issues? What is Russia's role in the creation of a new system for global economic regulation?

I must say I’m very much in favor of the G20 and of BRIC. I don’t have any trust in the UN. And I think Russia should take a step forward to modernize international institutions and should not hide behind the UN and the Security Council and so on. And these are also institutions from the years after 1945, but today we need modern institutions like the G20, like BRIC. And as the new Brazilian president recently said, the BRIC countries are very important for Brazil; I think they’re as important for Russia. And I think that we should find a kind of general secretary for these organizations. These are the new organizations for the new world of the 21st century, and we don’t need to always go back to the old institutions. We need new ones. Therefore, I think Russia should take on a very important role in the G20 and should also to participate in all kinds of regulations.

What principles should be followed in the creation of a global mechanism to respond to the risks of the next crisis?

This may sound a little bit contradictory for me, but the Security Council hasn’t really solved any crisis over the last few years… and in Africa, well… but what the G20 could be and inside the G8 there could be a sort of economic security council, and Russia should take a major role in it. This could be a system of warning and something that will take action when a crisis approaches. And maybe Russia could take a major role in introducing an economic security council, not with the members of the Security Council in the UN, but with the members of the G8, G20, or even, if nobody wants to follow you, they could start a small one inside the BRIC countries. This would be fantastic, I think, not only for Russia but for the whole world.

Source: http://en.rian.ru

WEF: The world economy can not 'face major new shocks'

The global economy is "in no position to face major new shocks", according to the World Economic Forum (WEF).

Its Global Risks 2011 report warns that economic imbalances, volatile commodity prices and currencies, and governments' budget shortfalls are "unsustainable".

Rapid population growth is another risk, pushing up demand for food, water and energy by 30-50% by 2030.

The WEF warns that there is no sign of governments agreeing on how to achieve sustainable economic growth worldwide.

The Global Risks report was published in the run-up to the forum's annual meeting in Davos at the end of January, which normally attracts more than 2,000 of the world's top business and political leaders.

Clusters of risk

The report identifies three clusters of risk: the world economy, suffering in the aftermath of the financial crisis and weakened by budget deficits and the cost of ageing populations; the illegal economy driven by corruption, organised crime, illicit trade and failed states; and the every growing demand for resources such as water, food and energy.

The authors, drawn from a global network of business and political leaders, try to map how a single problem in each cluster can quickly escalate and cause a wider crisis affecting other areas.

Robert Greenhill, chief business officer at the WEF, said that while it had taken months for the Wall Street crash of 1929 to affect the rest of the world, it took only minutes for the crash of 2008 to make an impact.

The report speaks of "rapid contagion through increasingly connected systems and the threat of disastrous impacts" on fragmented societies where economic imbalances undermine social cohesion.

With economies weakened by the global financial crisis and government budgets strained by the cost of supporting rapidly ageing populations, "both governments and societies are less able than ever to cope with global challenges," both man-made and natural disasters.

The WEF report, one of the gloomiest in recent years, warns that while nationalism is on the rise, there is also a "growing divergence of opinion between countries on how to promote sustainable, inclusive growth".

The G20 group of leading nations, Mr Greenhill said, had shown "an extraordinary ability to come together in a crisis". But he questioned whether the group would be "able to come together and identify and address a crisis before it happens".

John Drzik, chief executive of consulting group Oliver Wyman and one of the report's contributors, pointed to the volatility of commodity prices as a key threat to both companies and consumers.

The price of coffee was up 77%, corn up 52%, cotton up 84% and palladium up 97% in recent years, with "speculators bringing even more price volatility into the system".

The rapid growth of the world's population, he said, would increase the demand for food by 50%, for water by 30% and energy by 40% during the next two decades.

However, Mr Greenhill also stressed that it was not all gloom. Countries and companies that understood the risks, and came up with solutions to cope with the crisis, would be able to unlock "global opportunities".

By Tim Weber

Source: http://www.bbc.co.uk

Why dollars must not sink and tempers must not rise at the G20

The global economic crisis demands that all nations consider the wider international picture rather than narrow national self-interest

Brazilian President Luiz Inacio Lula da Silva may be leaving the world stage, but he still knows how to make an impact. His blunt prediction on the first day of the G20 summit in Seoul – that the world economy was headed for "bankruptcy" unless rich nations raise consumer demand rather than relying on exports to drive recovery – was a warning shot fired at Washington.

The US, which has been accused by key developing nations of attempting to deflate the dollar with a $600bn quantative easing programme, also came under fire from China. "Don't make other people take the medicine for your disease," Yu Jianhua, a director general at China's ministry of commerce, told reporters in South Korea.

At the heart of this is the nature of global imbalances. For America, growth should return by exporting more and getting people to spend at home. For many developing nations who rely on selling goods and services into richer markets, this means sacrificing themselves on the altar of US interests. It's not just big, poorer nations, that are concerned: Germany, the world's third-largest exporter, is singing the same tune as South Korea, China and Brazil.

These countries see the dollar's fall as part of a feared circle of competitive devaluations across the major economies. Yet the US can simply shrug these attacks off – as its central bank can keep printing dollars.

The result is lots of money flowing into emerging economies, which are left to face a series of difficult decisions over the influx of dollars. Deflating a series of asset bubbles is the last thing developing nations need to tackle – especially given the bigger challenges of social inclusion, food security and infrastructure spending.

But if they sit on their hands and do nothing, poorer nations face damaging their export competitiveness by letting their currencies rise. If they intervene to keep their currencies low, the risk is that they end up holding lots of worthless greenbacks. The least palatable option is the tricky policy decision to use capital controls to keep the cash out.

What this boils down to is the inability of developing nations to translate their growing economic heft into meaningful pressure on the US. It is a dramatic illustration of where real power lies in the global system. The world's "emerging" powers are still that – and will be so for many years to come. They may represent the future, but developing nations lack the diplomatic firepower to sway the world's great powers.

What the world is dealing with is a legacy of history. The rules governing global monetary reform evolved in a uni-polar world where the dollar was dominant. Today we face a multi-polar system of currencies. The features of the past created today's problems. To insulate against volatile currency flows and speculative attacks, developing nations accumulated dollars. The dollar's role as the global reserve currency encouraged unsustainable lending in the US.

But what are the rules appropriate for both the richer nations and for large emerging markets such as China, South Africa, Brazil and India? It's hard to see how a public punch-up at Seoul is going to answer that question. The G20 aspires to be a global club, steering the world economy out of a slump – and that does mean countries must consider the international picture, rather than simply their own, narrow national interest. It means not just letting the dollar sink and tempers rise in South Korea.

Perhaps the rest of the world should recognise how important the US is to the global economy – and accepting that the world's richest nation might need a helping hand. At the same time, the G20 could also think about the poorest too – by throwing open their doors to goods and services from the least developed countries. The world's biggest economies need to prove that the G20 is more than just a place to talk to each other.

Source: Guardian
www.guardian.co.uk

Concerning Capital Inflows

By Manoj Pradhan

China's hike in banks' reserve requirements today served notice to the G20 leaders' meeting later this week that capital inflows remain a major problem for EM policymakers. Brazil Finance Minister Mantega's ‘currency war' tag has continued to stay prominent in the lead-up to the G20 summit and certainly in discussions in the media. If currency tensions are indeed frustrating EM policymakers, then perhaps the blunt tools of interest rate cuts could be called upon in the future. This would represent an important turning point in EM dynamics for growth, inflation and currency movements. However, if a currency ‘war' is not a huge concern for EM policymakers, then the use of only FX interventions and possibly mild capital controls could be enough to alleviate EM concerns. And this is indeed the story that seems to coalesce from the views of our EM economics teams. Rather than aggressively fighting a currency war with every tool available, EM central banks seem to be keeping the blunt tool of policy rate cuts away from the skirmish so far. Rather, they seem to prefer the well-directed tool of FX intervention to soak up capital inflows and consequently increase FX reserves.

But which exchange rate to consider? With QE2 emanating from the US, EM and DM currencies have appreciated vis-à-vis the US dollar. However, the effective appreciation of EM currencies against a broader basket of currencies has been much smaller (see EM Macro Strategy Update: Considerations on Currencies, October 15, 2010).

With AXJ economies tied closely to China through their trade links, and the Chinese currency virtually pegged to the dollar (modest appreciation aside), AXJ economies are effectively tied to the USD/CNY peg. Latin America also has close trade links with the US and growing ties to China. However, the situation is different for some countries in the CEEMEA region. For the CEE economies, the US dollar is secondary in importance to the euro. In fact, since the dollar affects imports (specifically commodity imports) more than exports, some appreciation against the dollar is not unwelcome.

QE blocs: Enhanced capital flows to emerging markets courtesy of QE2 have produced varying degrees of discomfort in the EM world. In a past note, we suggested that QE2 would create two ‘blocs' among EM economies (see "QE20", The Global Monetary Analyst, October 13, 2010). The first bloc, with economies at risk of overheating, would allow currencies to appreciate and dampen domestic growth and inflation. The other, with fewer concerns of overheating, would find currency appreciation unwelcome. This second bloc would likely act to stem the appreciation, and end up stimulating domestic growth. Getting a hands-on perspective from our EM economics teams, we find that this split is indeed borne out. The collective wisdom of our teams suggests that the economies that find currency appreciation unwelcome are also economies where overheating risks are small. On the other hand, economies at risk of overheating do not find the currency appreciation as offensive (with the notable exception of China, as discussed below), as policymakers there welcome the dampening effect that the appreciation has on domestic growth and inflation.

In economies at risk of overheating where domestic demand is strong and the central bank allows currency appreciation, US imports will likely become cheaper. In economies where currency appreciation is resisted, domestic demand is likely to get a boost, and this should increase the demand for all imports, including imports from the US. This is what we called a win-win situation for the US in our QE20 piece.

As always, China is different: China finds the enhanced pressure on its currency highly unwelcome and it will likely allow only a slow and steady appreciation. However, China's highly effective capital and credit controls imply two things: i) there really has been no impact of QE2 on the currency, but FX reserves have probably soaked up a large quantity of capital inflows; and ii) the domestic economy has not received an additional stimulus from QE2. With Chinese growth at 10% for 2010 and 9.5% in 2011, one can hardly say that China should grow faster to generate import demand. In short, China does not fit our dichotomy as it resists currency appreciation on the one hand but maintains firm control over domestic financial conditions and the economy on the other.

The policy response: The policy response from EM economies to the signals about QE2 in the US sent since August is quite varied, but a majority of central banks in the EM world have kept policy unchanged since then. A handful have responded by postponing hikes (the central banks of Peru and Poland have pushed rate hikes further out to keep the currency from strengthening further), while the SARB has actually eased policy outright (and further easing appears to be on the cards - our economists are forecasting a 50bp cut, see South Africa: Rate Call Change - We Expect a 50bp Cut, November 1, 2010). Some central banks that face strong domestic growth have even tightened policy despite the risk that such measures will invite even more capital inflows and put additional pressure on currency values.

Digging deeper: Overheating economies: A large majority of EM economies have shown strong growth. Unsurprisingly, AXJ economies feature prominently here along with Brazil, Chile and Peru from Latin America and Turkey, Israel and Poland from the CEEMEA regions. A smaller number of these strongly growing countries, however, have inflation concerns. This latter group includes India, Indonesia, China, Korea, Brazil, Peru and Poland. Clearly, this bloc would prefer some help in dampening domestic growth, and some currency appreciation might not be unwelcome. We illustrate that these overheating economies are also where central banks are not extremely concerned about currency appreciation (with the important exceptions of China discussed earlier and Brazil discussed below). However, as the cases of Poland and Peru show, even inflation concerns have sometimes been subordinated to keep in check excessive appreciation of the currency. In the case of Poland, inflation concerns are likely to win out fairly shortly, according to our Poland economist, Pasquale Diana.

Brazil clearly dislikes its stronger currency, has been intervening aggressively in FX markets and has quickly raised taxes on foreign investments in local fixed income products. The postponement of rate hikes in Brazil, however, can be traced back to its own slowdown earlier in the year rather than to a growing probability of QE2.

Digging deeper: No overheating: In economies where growth has either not led to inflation and even where growth has been weak with inflationary concerns, the EM emphasis on growth clearly shows because of the desire of these economies to keep their currency from appreciating. Most economies in this category have either intervened in FX markets or have stayed put on monetary policy. Thus, either through accumulating FX reserves leaking into the economy or through the postponement of monetary tightening, economic growth is likely to benefit from a tailwind.

The economies where growth is weak and inflation risks are present (Romania and Hungary) are worth noting. As noted before, these economies are more closely tied to the euro and might actually welcome an appreciation against the dollar, given the asymmetric effects on imports and exports. They do not therefore face the same dilemma as most other EM economies.

FX intervention: Central banks appear to be less reluctant to get involved in FX intervention. The bulk of EM central banks are involved in at least some FX intervention. Further, half of that pack have been intervening quite aggressively in currency markets, but even then with limited results. The difference in the way policymakers seem to have used broad monetary policy and FX intervention to deal with QE-related inflows could be explained in three ways: i) monetary policy is seen as a blunt instrument with broad effects, while FX intervention is seen as a targeted tool best equipped to deal with an FX problem; ii) FX interventions are a less public way of dealing with capital inflows, compared with the public attention that usually accompanies monetary policy changes and capital controls; and iii) EM central banks view FX policy and reserves policy as being distinct, and are accumulating reserves in excess of levels that could ostensibly be used for the defence of the currency.

Different strokes: Different emphases on each of these explanations apply to EM economies. For example, the objectives of FX intervention in Turkey appear to be oriented towards increasing the size of the reserves. Brazilian FX interventions, in line with its aggressive rhetoric and milder capital controls, have probably been aimed at keeping the currency from appreciating. And finally, in Israel, FX interventions have been used to stifle the impact of policy rate hikes on the currency. In all three cases, however, FX interventions have not been entirely successful in keeping the currency from appreciating.

Summary: The extent to which the ‘currency war' debate has been ramped up in the media does not gel with the feedback from our EM economics teams. In general, EM central banks appear to be unwilling to take strong, aggressive action in the form of postponing policy tightening or cutting rates outright (with the notable exceptions of the central banks of Peru and Poland for postponed rate hikes, and the SARB for outright easing). Rather than fighting any such ‘currency war', EM central banks appear to be dealing with the very familiar three-way trade off between capital inflows, exchange rate concerns and monetary policy independence - the trilemma (see "No ‘Currency War'...Yet", The Global Monetary Analyst, October 6, 2010). Central banks seem far less reluctant to use FX intervention. In fact, FX intervention is likely being used as a better directed tool to temper FX appreciation and build up FX reserves (in some cases) at the same time.

The feedback from our EM teams suggests that QE is indeed splitting the EM world into two broad blocs. Economies with strong growth and overheating concerns appear to be more willing to accept currency appreciation in order to dampen domestic growth and inflation. Countries where growth is weak, however, seem to be less tolerant of currency appreciation. The desire there to keep the currency from appreciating is likely to lead to higher domestic growth either through newly accumulated FX reserves leaking into the economy or via inaction (or less tightening, or even easing) on the policy front.

Source: MorganStanley
www.morganstanley.com

Finally, a talking-shop worth having

The G20 has been a mild success. If it sticks to boring, pragmatic incrementalism, it might just remain one

ONE of the few winners from the global financial crisis was the G20, a group of the world’s biggest economies. These countries’ leaders have met four times in the past two years to chart a common response to the global recession and find ways to prevent a repeat. With big players from the emerging and rich worlds around the table, the G20 has a legitimacy that is lacking in other economic clubs, such as the rich-country-only G7. In the darkest moments of the crisis the G20 yielded impressive results, from a common commitment to fiscal stimulus to more resources for the IMF. Optimists hoped it could become something all too rare in international economic diplomacy: a talking-shop worth having.

Those hopes can be realised even though there are signs that the G20’s utility has faded as the world economy has recovered. The leaders’ last meeting, in Toronto in June, was a washout. It did nothing to reconcile widening divisions, particularly between Europeans and Americans, over the merits of short-term budget austerity. That feebleness has raised the stakes for the next gathering, in Seoul on November 11th-12th.

Global currency tensions are rising as America’s Federal Reserve embarks on a second round of “quantitative easing” (printing money to buy bonds, see article), as China resists allowing the yuan to strengthen much and as other emerging economies face a surge of capital inflows. If the G20’s leaders manage no more than another mealy-mouthed communiqué, many people will begin to suspect that it—like so many other of the Gs—is a waste of time.

That would be a pity. For behind the scenes, under the energetic chairmanship of South Korea, the G20 has notched up a few notable accomplishments in recent weeks. There has at last been some progress in overhauling the IMF. A reform of the “quotas” that determine countries’ heft will increase the clout of emerging economies. Over-represented European countries have been cajoled into giving up two seats on the board. The IMF has also revamped its lending schemes so that well-run countries have access to large amounts of cash if a crisis hits. South Korea argued, rightly, that such a safety net is essential if emerging economies are able to withstand financial crises without piling up ever-larger foreign-exchange reserves. These are small but important improvements. And, thanks to the G20, they were done quite quickly (at least by the glacial standards of international institutions).

If the Seoul summit is to be a success, the G20’s leaders must apply the same approach—call it urgent incrementalism—to today’s main challenge: rebalancing global demand so that it relies less on overindebted America and more on domestic spending in vibrant emerging economies, particularly China. The process will take several years, and is complicated by domestic politics. In America the Republican victory in the mid-term elections reduces the already slim chances of progress either on short-term fiscal stimulus or medium-term deficit reduction. Fiscal gridlock means extra reliance on quantitative easing to boost the economy. That, in turn, will provoke extra capital flows to emerging economies. And since the main emerging economy, China, keeps its capital account closed and its currency pegged, the pressure on others is all the greater.


A Korean lesson for France

The G20 meeting will not magically resolve these tensions. But it can help manage them. It can provide a common analysis of how far countries’ currencies are over- or undervalued and where current-account balances ought to head. America has proposed limiting these imbalances to 4% of GDP. That is too rigid, but there is plenty of scope for the G20 to agree on the ranges countries’ current-account balances should reach.

Incrementalism, however, even of the urgent sort, may not be grand enough for France, which takes over the leadership of the G20 on November 12th. Nicolas Sarkozy, France’s president, has made clear that he wants a debate “without taboos” on the future of the international monetary system. He wants to tackle big subjects, such as the dollar’s role as a reserve asset (see article). Unfortunately, history suggests that big-picture debates on the future of the international monetary system rarely yield results, while diverting attention from smaller, practical goals. France should take note. The G20 will remain worth having only if it sticks to the art of the possible.

Source: The Ecoomist
www.economist.com

Germany attacks US economic policy

By Ralph Atkins, FT.com

Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.

Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a "deep crisis," he also warned over the weekend.

His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week's US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through "quantitative easing".

On Friday, Mr Schäuble described US policy as "clueless". In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed "increase the insecurity in the world economy".

" They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking."

Mr Schäuble added: "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."

Germany's export success, he argued, was not based on "exchange rate tricks" but on increased competitiveness. "In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems -- German export surpluses are not part of them."

There was also "considerable doubt" as to whether pumping endless money into markets made sense, Mr Schäuble argued. "The US economy is not lacking liquidity."

On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said.

Germany's proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe's 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union "was not founded to enrich financial investors".

Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.

Source: CNN
www.cnn.com