G20 struggles to find common ground

Major nations struggled Thursday to break a deadlock on how to fix problems cramping the world economy as President Barack Obama insisted that a strong U.S. is crucial for a wider international recovery.

In a letter to the Group of 20 rich and major developing nations, Obama warned the U.S. cannot remain a profligate consumer using borrowed money, and needs other countries to pull their weight to fix the world economy.

He is in Seoul, the South Korean capital, to attend a two-day summit of the G-20 which encompasses developed nations such as Germany and the U.S. along with emerging giants like China, Brazil and India. The summit officially opens later Thursday, hoping to tackle deeply sensitive issues that include state manipulation of currencies, trade gaps, protectionism and strengthening regulation of banks.

“The most important thing that the United State can do for the world economy is to grow, because we continue to be the world’s largest market and a huge engine for all other countries to grow,” Obama said at a news conference.

The G-20, which was established in 1999 and raised to a summit level two years ago, has become the centerpiece of top-level efforts to revive a struggling global economy and to prevent a financial meltdown of the kind seen two years ago.

Yet compromise among G-20 countries has looked difficult in recent weeks. It is divided between those like the United States that see the top priority as getting China to let its currency rise and those irate over U.S. Federal Reserve plans to pump $600 billion of new money into the sluggish American economy, effectively devaluing the dollar.

“Reducing imbalances between developed countries and developing countries is an urgent matter we have to resolve for a balanced global economy,” South Korean President and host Lee Myung-bak told a business leaders’ conference ahead of the summit.

Over the past two days, government ministers and senior G-20 officials — called ‘Sherpas’ in diplomatic-speak because they do much of the groundwork — have labored to hammer out a substantive joint statement to be issued at the end of the summit Friday.

“Major countries have been deadlocked, so the agenda is likely to be handled when leaders gather at the formal reception and working dinner” that is scheduled for Thursday evening, said a summit spokesman, Kim Yoon-kyung.

A major issue confronting the G-20 is how to craft a new global economic order to replace one centered on the U.S. running huge trade deficits while countries such as China, Germany and Japan accumulate vast surpluses. The U.S. runs a trade deficit because it consumes more foreign products than it sells to others.

In a letter to fellow leaders at the G-20, Obama made it clear that the U.S. cannot remain the world’s consumer, propping up others by borrowing and spending. He is pitching for a balanced recovery across the globe — tougher to achieve when national interests collide.

“The foundation for a strong and durable recovery will not materialize if American households stop saving and go back to spending based on borrowing,” Obama wrote. He pushed for exchange rates based on the market and no more “undervaluing currencies for competitive purposes.”

The message was primarily aimed at China, whose trade surplus with the U.S. is bigger than with any other trading partner, including the European Union. The U.S. contends that China deliberately undervalues its currency, the yuan, which gives it is exports an unfair competitive edge.

A U.S. proposal to limit current account surpluses and deficits to 4 percent of gross domestic product as a way to reduce trade gaps has met with opposition.

“Targets are neither economically appropriate or appropriate from a financial perspective,” German Chancellor Angela Merkel said. “Current account balances are hard to target. What’s important is that we don’t resort to protectionist measures.”

Germany is the world’s second-biggest exporter after China and strong exports have helped its economy to stage an impressive comeback this year.

As the summit approached, the currency spat received fresh fodder after the U.S. Federal Reserve last Wednesday announced plans to purchase $600 billion in long-term government bonds to try to drive down interest rates, spur lending and boost the U.S. economy.

Analysts say it could spark an influx of cash into the financial markets of emerging nations in search of higher returns, making their currencies stronger, their exports more expensive and creating bubbles in stocks and other assets. While a cheaper dollar would benefit U.S. exports it could also trigger a so-called currency war as countries race to devalue their currencies.

On Thursday, small protests by about 2,500 people took place in Seoul against G-20 and the South Korean government. A South Korean woman doused herself with paint thinner near the summit venue but was stopped by police before she could set herself on fire.

After the G-20 summit, many of the leaders will go to Yokohama, Japan for the Asia-Pacific Economic Cooperation forum summit this weekend.

Source: AP