The Group of 20 nations failed to broker a deal to resolve currency and trade disputes at a summit on Friday, adding to fears of a breakdown in international policy co-ordination.
Leaders instead issued vague pledges to review global economies policies next year, restating in a final communiqué calls for countries to refrain from “competitive devaluation of currencies” and urging moves “towards more market-determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals”.
China, which has been widely accused of artificially depressing the value of its currency, has insisted its exchange rate policy already reflects this pledge.
The statement does not indicate a new accord for countries to refrain from “competitive undervaluation” of currencies. This term was inserted at the behest of Washington in a draft communiqué but was excised from the final text.
The summit concluded amid renewed fears over the health of advanced economies, particularly in Europe. The region’s ongoing sovereign debt crisis was brought into sharp relief Friday after Irish government bond yields soared as the country slashes public spending in an economy that is expected to contract 0.3% this year.
In Seoul, the G20 repeated its commitment to empower the IMF to assess international economic policies and for the lender to provide “indicative guidelines” next year on how to generate sustainable balanced global growth.
“These indicative guidelines composed of a range of indicators would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken,” the communiqué stated.
The group re-affirmed a commitment to avoid trade protectionism. It also added that those emerging economies with overvalued flexible exchange rates are entitled to take “carefully designed macro-prudential measures” to counter capital inflows.
Leaders also called on the IMF, along with the Bank for International Settlements and the Financial Stability Board, to draw up “standards” for such measures.
“The summit was broadly in line with market expectations,” said Gerard Lyons, chief economist at Standard Chartered. “Given the intractable policy differences, a resolution to the currency issue obviously cannot be agreed anytime soon.” He added that “it is difficult to get either excited or too depressed by the summit – at least negotiations are still taking place.”
But Lyons said that a lack of consensus between nations on global exchange rate regimes and current account balances had raised the risk of trade protectionism and financial market volatility.
Others expressed concern over the increasingly bitter war of words between leading nations. “The lack of substance of the G20 communiqué was not surprising but the tone of the debate – the acrimony between US and China – is worrying and will weigh on global markets,” said Peter Attard Montalto, emerging markets economist at Nomura International.
Beijing remains squarely in firing line as western leaders and the IMF called on surplus nations to appreciate its currency to boost domestic consumption.
“Exchange rates must reflect economic realities ... Emerging economies need to allow for currencies that are market driven,” US President Barack Obama told a news conference after the communiqué was agreed.
“The renminbi is one that’s an irritant not just to the United States but is an irritant to a lot of China’s trading partners and those who are competing with China to sell goods around the world.”
Brazilian finance minister said Friday that a “currency war” was still in full swing.
In a report released Friday, the IMF said economic projections submitted by G20 nations in April “remain distinctly optimistic compared to past recoveries.” The IMF forecasts G20 growth will increase from 4.2% next year to 5% in 2014.
The G20 last year agreed to a “Mutual Assessment Process” (MAP), whereby the IMF will review the group’s medium-term economic forecasts to assess how national policies mesh with the global economic interests.
The process lies at the heart of G20 steps to reconcile global imbalances between chronic exporters such as China and debt-ravaged importers, principally the US.
But global leaders in Seoul failed to clarify whether the MAP would outline a country-by-country scorecard assessing countries on various metrics, such as current account balances, bank liabilities and exchange rate policies, and suggest numerical targets. It was also unclear how a monitoring system to detect global imbalances will be fleshed out.
“A key risk is that the mutual assessment process will be an ineffective talking shop or smokescreen for global policy inaction,” said Montalto. But he added that empowering the IMF to review economic policies was still a positive step as economic discussions are more likely to be in the public domain, increasing the pressure for policy action.
Meanwhile fears grew that international policy co-ordination may run out of steam. “Countries will have to implement policies in the national interest to satisfy their domestic constituents. Co-ordination was possible 18 to 24 months ago but it looks unlikely know,” said Lyons.
The IMF said in its report Friday that if emerging markets fail to increase domestic consumption, a “demand deficit” could torpedo the global recovery. It added that risks to global growth had jumped since the Toronto summit in June, citing growing sovereign debt risks, the threat of trade protectionism and currency instability and continuing stresses in the financial sector.
The other key points of the communiqué included:
The G20 agreed, in line with expectations, proposals to give emerging economies greater say in the running of the IMF
Basel III standards on bank capital, liquidity and capital ratios were rubberstamped
G20 leaders described 2011 as a “window of opportunity” to complete the Doha multilateral trade negotiations.
The G20 agreed to adopt the “Seoul Consensus for Shared growth” with a focus on infrastructure investment. However, a proposal – continued in a draft communiqué – to give the world’s poorest countries duty free and quota free access to G20 markets was not included.