Countries that resort to “artificial” short-term measures to boost exports such as depressing their currencies risk tipping the global economy back into crisis, Mexico said yesterday, in what will be seen as a thinly veiled attack on Brazil.
Jose Antonio Meade, finance minister of Mexico that holds the chair of the Group of 20 nations, said a round of tit-for-tat currency devaluations by major exporting nations risked torpedoing global growth and eroding long term economic competitiveness.
“We need to avoid the temptation of artificial measures if the world is going to get out of the crisis,” Meade told Emerging Markets in an exclusive interview.
His comments came as Brazil’s finance minister Guido Mantega, writing yesterday in Emerging Markets, threatened to deploy an “arsenal” to combat upward pressure on the real.
“We will not sit idle in the face of the currency war” Mantega said, laying blame on ultra-loose monetary policy in the West for a destabilizing surge in capital inflows to emerging nations.
But Meade said policymakers in major economies such as Brazil should focus instead on boosting domestic demand and creating conditions for increased consumption and investment.
Such policies were “more consistent with long-term growth than unilateral policies with an artificial exchange rate that might provide a competitive advantage, but do not strengthen internal conditions that are the foundation of competiveness”.
The row between Brazil and other countries including the US and China threatens to overshadow a forthcoming summit of G20 leaders.
But Meade said the June summit in Los Cabos will seek to evaluate “the progress made dealing with currency imbalances and implementation of financial reforms”.
Leaders will focus on four other broad priorities, he said: examining global imbalances, financial stability, public policies for food and energy prices, and development.
Meade dismissed suggestions that the previous G20 summit last November had failed in its ambitions, saying instead that agreement between nations in Cannes helped lay the foundation for the moderate global recovery now under way.
“The world today is in a better place than six months ago. Concretely, the application of policies in Europe are correct and have safeguarded the recovery that we are seeing,” he said. “We are seeing better policies and are moving in the right direction, but there is still much to do.”
Latin finance chiefs in Montevideo urged their G20 counterparts to shift their focus away from short term crisis busting measures to fundamental reforms for longer term growth.
Colombian Finance Minister Juan Carlos Echeverry said it was time for the G20 to adopt a comprehensive vision for global growth as the slump deepens across advanced economies and as output in Bric nations begins to falter. He said the group “needs to look at what is going to happen as the engines of world growth change.”
Meade said he hoped to build consensus among nations in Los Cabos over boosting the IMF’s financial firepower.
He said this would be contingent on a review by the eurozone of its liquidity needs – a factor that would weigh heavy on any IMF funding decision. Non-European countries have called for Europe to use more of its own resources before turning to the Washington-based lender.
The Fund’s biggest shareholder, the US, has been most vocal in its refusal to let Europe pass the buck to the IMF in dealing with its crisis. The IMF is seeking $600 billion to boost available resources to more than $1 trillion.
While Meade said it was too early to discuss likely outcomes from Los Cabos, he said Mexico “would be instrumental in the final result” on IMF resources.