At a meeting in South Korea, G20 finance ministers recognized the quickening shift in economic power away from Western industrial nations by striking a surprise deal to give emerging nations a bigger voice in the International Monetary Fund.
A closing communique contained no major policy initiative after a U.S. proposal to limit current account imbalances to 4 percent of gross domestic product, a measure aimed squarely at shrinking China’s surplus, failed to win broad enough backing.
Indeed, the United States itself came under fire from Germany and China for the super-loose monetary policy stance it has adopted to try to breathe life into the sluggish U.S. economy.
German Economy Minister Rainer Bruederle said he had made clear that easing was the wrong way to go.
“An excessive, permanent increase in money is, in my view, an indirect manipulation of the (foreign exchange) rate,” he said.
HEADING FOR CHINA
The main aim of the two days of talks, which precede a G20 summit in Seoul on November 11-12, was to ease currency strains that some economists feared could escalate into trade wars.
Developing countries are worried that Washington, by flooding the U.S. banking system with cash, is pumping up their asset prices and exchange rates, thus undermining the competitiveness of the export industries on which they rely for growth.
China, among others, frets that the U.S. policy stance will debase the dollar, the lynchpin of the global economy.
In a thinly veiled reference to the United States, the G20 statement said advanced countries, including those with reserve currencies, would be vigilant against excessive volatility and disorderly movements in exchange rates.
Washington, by contrast, is frustrated over the refusal of China in particular to let its currency rise to a level that reflects its growing economic power and would help reduce its big trade surplus with the United States.
“If the world is going to be able to grow at a strong, sustainable pace in the future… then we need to work to achieve more balance in the pattern of global growth as we recover from the crisis,” U.S. Treasury Secretary Timothy Geithner said.
U.S. officials were pleased that the communique committed G20 members to “refrain from competitive devaluations” of their currencies and to pursue a full range of policies to reduce excessive external imbalances.
Geithner will keep up the pressure on Sunday for a stronger yuan when he holds talks in Qingdao, China, with Vice-Premier Wang Qishan, who has broad responsibility for economic policy.
“The content of the G20 statement is generic and broadly in line with expectations, but this should not detract from the fact important progress was made in giving emerging market countries a greater voice in the IMF,” said Claudio Piron, a currency strategist at Bank of America Merrill Lynch in Singapore.
Despite the sniping from Germany and China, whose finance minister demanded responsible policies from issuers of major reserve currencies — code for the United States — host South Korea put an optimistic spin on the outcome of the meetings.
“This will put an end to the controversy over foreign exchange rates,” said Finance Minister Yoon Jeung-hyun.
South Korea was also able to point to the deal to shift more than 6 percent of the IMF’s quotas — membership subscriptions that help determine voting power — to emerging economies whose clout in the Fund has not kept pace with their economic ascent.
Europe will give up two seats on the fund’s 24-strong Executive Board.
IMF Managing Director Dominique Strauss-Kahn called the agreement historic. “This makes for the biggest reform ever in the governance of the institution,” he said.
As part of the agreement, China will overtake traditional powerhouses Germany, France and Britain to become the third most powerful member of the IMF, up from sixth spot now. India will also wield more power in the fund.
“Our complaint was that the quota share should reflect ground reality and economic strengths currently. Otherwise, it would have eroded the credibility of the institution. That has now been corrected,” Indian Finance Minister Pranab Mukherjee said.