Finance chiefs of the world’s dominant economies are close to agreeing on how to track dangerous imbalances in the global economy, part of the Group of 20 rich and developing nations’ efforts to prevent another financial crisis.
European Union Monetary Affairs chief Olli Rehn said he was confident that there would be agreement “to identify and address global imbalances,” but that discussions on the precise indicators were still continuing.
The talks Friday focused on coming up with a list of indicators to measure imbalances- current accounts, real effective exchange rates, currency reserves, as well as public and private debt levels, Mr. Rehn said. The current account measures trade and capital flows into and out of a country.
Germany’s Deputy Finance Minister Joerg Asmussen said a majority of countries supported sticking to those five indicators. China in particular has so far opposed targeting exchange rates as it has resisted letting its own currency, the yuan, appreciate more quickly against the dollar.
French Finance Minister Christina Lagarde warned that a failure to address imbalances “leads us straight into the wall of another debt crisis,” while President Nicolas Sarkozy said that countries must not get complacent as big parts of the world are starting to recover from the crisis that had championed the G-20 as the new platform for global decision making. “That would be the death of the G-20,” Mr. Sarkozy warned.
France has set an ambitious agenda for its G-20 presidency in an attempt to revive the grouping, after a meeting of heads of state in Seoul last year failed to come up with specific yardsticks for measuring imbalances. But the year’s first gathering in Paris left many of the more difficult questions to be decided at later meetings.
In their working groups Friday and Saturday, officials will not even attempt to set firm limits for when imbalances actually become dangerous. The still more difficult question of how to enforce any thresholds that leaders eventually sign up to is yet further off the agenda.
“Name and shame” policies like those used in the fight against international tax havens would be one, albeit toothless, possibility.
While there is widespread agreement that smoothing out imbalances is key to getting the global economy back in track, how that should be done is more divisive.
The mere existence of the imbalances points to vastly different growth models among the world’s biggest economies, with each arguing that changing its strategy - whether based on exports, exchange rate controls, or the free flow of money - would hurt its recovery.
What is clear to most economists is that sticking to the status quo could be fatal.
In the years before the financial meltdown of 2008, countries with trade surpluses ploughed money into mortgage and other investments in the United States, helping escalate their value, U.S. Federal Reserve Chairman Ben Bernanke told his G-20 colleagues. But the U.S. failed to safely absorb money flooding in from emerging nations like China, Middle Eastern oil countries and industrialized countries in Europe, Mr. Bernanke said.
The Fed Chairman called on surplus countries like China to let their exchange rates float freely, and urged nations like the United States to narrow their budget shortfalls and save more.
“If there is no stabilizing system, then you can have situation where like today, you have a two-speed recovery and demand is not optimally allocated around the world,” Mr. Bernanke said.
Emerging markets like China and Brazil have come out of the financial crisis much stronger than some of the more traditional powers such as the U.S, Europe and Japan.
Ms. Lagarde said the talks should help G-20 members “move from understanding to cooperating and collaborating.” Finance ministers will meet several more times this year before France’s G-20 presidency culminates with a heads of state summit in Cannes in November. “It’s going to be quite a task, but that’s where we need to go,” Ms. Lagarde said
U.S. Treasury Secretary Timothy Geithner painted a more optimistic picture of the world economy. “The global economy - by almost every measure - is in the best shape it’s been in at any time in the last two or three years,” he told the conference. “I think there is justifiable, growing confidence.”
However, Mr. Geithner said that tighter financial regulation - “in a way that gives us a better balance between stability and the types of efficiency and innovation that we need from our financial markets” - was central to sustaining that recovery.
He urged all countries to evenly implement the Basel III rules on bigger capital buffers for banks, taking forward one of the key achievements of previous G-20 meetings.