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As G20 squabbles, monetary policy may work itself out

French President Nicolas Sarkozy gives a speech to G20 central banks governors at the Elysee Palace, on February 18, 2011 in Paris, as part of the two-day meetings with G20 Finance ministers and central bank governors, their first under France's presidency, focused on obtaining common criteria for measuring global economic imbalances.

Lionel Bonaventure/AFP/Getty Images/Lionel Bonaventure/AFP/Getty Images

It's an old story. On Friday, the United States and its allies declare that China should stop artificially holding down its currency. China calls for the end of the U.S. dollar as the world's reserve. France demands a global banking tax. A group of countries propose a complex system to bring the world's currencies together.

On Saturday, none of it happens, except some small technical steps toward economic harmony. Everyone goes home. Six months later, it all starts again.

This is known as the G20 finance minister's summit, currently taking place in Paris, but it could be a formal-dress remake of the movie Groundhog Day, without the jokes or love scenes.

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The G20, the meeting of major-economy leaders that played an important role in stabilizing the global economic crisis that began in 2008, has in recent years devolved into an endlessly reiterated squabble over currency and trade imbalances between the world's great economies - in other words, worries that debt is piling up in some countries and excess currency reserves in others, and that China's currency, the renminbi, (RMB) is being kept artificially low in order to keep its exports cheap to continue to stoke its high-growth economy.

This weekend will be a large-scale attempt, spearheaded by Canadian Finance Minister Jim Flaherty, to come up with a formal system to detect and fix imbalances, ideally to thwart another destructive debt crisis.

The meeting was given a dramatic impetus Friday with a rare speech by Ben Bernanke, the U.S. central-bank chief, who laid the blame for the financial crisis on U.S. policies, but argued that China's cheap-currency policy could trigger another crisis.

"The maintenance of undervalued currencies by some countries [China]has contributed to a pattern of global spending that is unbalanced and unsustainable," he said. "To achieve a more balanced international system over time, countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals."

But behind the scenes, there is a strong sense that the problem is taking care of itself: While the 20 wealthy nations debate the minutiae of the plan, China and the West are correcting their own imbalances at an aggressive pace.

On one hand, China's currency is being driven down by the new economic realities within China: Wages and food prices are rising fast as Chinese workers quickly become consumers, thus pushing the RMB upward. China's imports rose 51 per cent last year, compared with 38 per cent for exports, indicating a powerful boom in domestic consumption, while its inflation rate has risen to 4 per cent, outstripping most Western countries.

On the other hand, both the dollar and the euro are being driven downward - in the United States by policies of quantitative easing, which increase the money supply and push down the value of the currency, and by the paying down of deficits; in Europe by debt and fiscal crises that are turning investors away from the 17-nation currency.

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Some feel that these economic forces may turn the international imbalance into a self-solving problem. An appreciating Chinese currency and a deflating dollar and euro will lead to the result that the G20 has been seeking for three years - possibly faster than G20 policies can manage.

Tim Geithner, the U.S. Treasury Secretary, has proposed that countries' current-account surpluses should not exceed 4 per cent of their economic output (GDP). That may soon be a reality. While China's surplus stood at 5.2 per cent of GDP last year - down from 10.6 per cent in 2007 - most analysts forecast it will fall to between 3.1 and 3.7 per cent by 2012, entirely as a result of inflation within China and the devaluation of the dollar.

Others feel that the economy is moving in the right direction, but not fast enough.

"Real RMB appreciation is substantial and the politics in China of faster nominal appreciation are probably as intense as the U.S. politics of fast deficit reduction," Wendy Dobson, a former Canadian Finance Department official who now teaches at the University of Toronto's Rotman School of Management, said in an interview with Reuters.

"Each knows what it has to do and each is moving in the right direction, but much slower than the rest of the world would like."

Mr. Flaherty said in Paris Friday, shortly before the G20 meetings began, that it's possible that market forces could solve the problem but that he and other Western governments believe that an imbalance-identifying-and-correcting mechanism is still important.

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"I suppose we'll see over time, but I can tell you we're still concerned about global imbalances, and this issue of foreign exchange will be one of the significant variables discussed this evening and tomorrow," he said. "There are some differences of opinion on the topic. China has its own view, and there are some nuances of opinion after that."

Even as the summit began, it appeared bogged down in the details of a mechanism for identifying imbalances. While the United States, Canada and others are seeking specific indices of debt, currency surplus, trade volumes and other measures, Germany and China both felt that broader economic and trade measures would do the trick.

"We think it is not appropriate to use real effective exchange rates and reserves," Chinese Finance Minister Xie Xuren said Friday - a view that would render the monitoring plan unworkable unless China changed its mind.

French President Nicolas Sarkozy, whose country is chairing the G20 this year and who has been pushing to reach a broad-spectrum international agreement under his presidency, urged ministers yesterday not to get bogged down in the details.

"We do not have much time, and we will not succeed in everything," he said Friday. "But the worst-case scenario would be to refuse to address the real subject - the international monetary order."

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About the Author
International-Affairs Columnist

Doug Saunders writes the Globe and Mail's international-affairs column, and also serves as the paper's online opinion and debate editor. He has been a writer with the Globe since 1995, and has extensive experience as a foreign correspondent, having run the Globe's foreign bureaus in Los Angeles and London.He was born in Hamilton, Ontario, and educated in Toronto. More

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