G-20 Split on Imbalance Indicators, Monetary Policy

Friday, 18 Feb 2011 07:54 AM

 

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The world's major economies were split down the middle on Friday over how to measure imbalances in the global economy in a bid to avert future financial crises, Japan's finance minister said.

Speaking hours before the start of a meeting of G-20 finance ministers and central bankers, Yoshihiko Noda said he was not sure they would reach any agreement on a set of indicators to assess economic equilibrium.

"It is uncertain whether the countries will agree on all indicators, but I think agreement on some is possible," Noda told reporters.

"From working group discussions, I get the impression countries are now split in half about their opinions."

In preparatory talks on Thursday, G-20 sources said China and Germany dragged their feet over a balance of payments indicator while Beijing was resisting including measurements of the real foreign exchange rate and currency reserves in the package.

Chinese central bank governor Zhou Xiaochuan, in Paris for the G-20 meeting, said Beijing would decide the pace of the appreciation of the yuan on its own and would be swayed by pressure from other countries.

A German source cast doubt on a deal at the two-day Paris session, saying Berlin wanted nothing less than a full list of five indicators to be used to tackle global mismatches.

"It is hard for us to imagine leaving some out, for example leaving out the currency-related ones while holding on the current account one," the German source told Reuters.

TWO-STEP

France has run into opposition with its push for greater transparency and regulation of commodities prices and a reform of the international monetary system and is pinning its hopes on measuring imbalances in the world economy, where the G-20 nations account for around 85 percent of GDP.

French Finance Minister Christine Lagarde said she hopes the first ministerial meeting of France's year-long G-20 presidency would agree a preliminary list of indicators in a two-step process leading to guidelines for more coordinated global economic policies by the end of the year.

With world shares hitting fresh 30-month highs, driven by bullish views of economic growth, investors seem content for the G-20 to achieve little, in contrast with the height of the crisis two years ago when markets were baying for policy action.

"Some may view this sort of outcome as a lost opportunity to prevent future risks, but markets would probably not welcome a heavy-handed attempt to subjugate domestic priorities for the sake of external balance, which could be disruptive unless done just right," Barclays Capital wrote in a research note.

The world's top central bankers were expected to discuss commodity price inflation and how to handle the divergence between booming emerging market economies and sluggish growth in most developed economies in a public debate on Friday.

Bank of Japan Governor Masaaki Shirakawa acknowledged that loose monetary policy in the developed world was pushing capital into emerging economies and helping inflate commodities prices but said it was necessary nonetheless.

Emerging powerhouses China and India have already raised interest rates to combat inflation and complain that "hot money" risks destabilizing their economies.

Pressure is mounting on the Bank of England to follow suit, with UK inflation double its 2 percent target.

The European Central Bank is not expected to tighten policy until late in the year at the earliest while the Federal Reserve continues to print money to pump prime its economy via a $600 billion bond purchase program, the source, emerging powers say, of the surge of capital inflows buffeting their economies.

"Monetary easing by developed countries is causing capital flows into emerging countries and that is partly to blame for a rise in commodity prices," Shirakawa told reporters.

"Still, monetary easing (policies) by developed countries are necessary measures," he said.

PRESSURE ON YUAN

In a paper prepared for the two-day G-20 meeting, the International Monetary Fund said eurozone debt tensions still posed a threat to global recovery, while fast-growing emerging nations risked overheating and surging food prices posed an inflationary risk.

The U.S. quantitative easing could cause a destabilizing flood of capital — the charge leveled by China and others — the IMF said, though it conceded this had not happened so far.

Fed Chairman Ben Bernanke, ECB President Jean-Claude Trichet, Shirakawa, the Bank of England's Mervyn King and People's Bank of China head Zhou Xiaochuan will speak at an event in Paris at around 1430 GMT on Friday.

U.S. Treasury Secretary Timothy Geithner is also due to speak at the conference organized by the Eurofi think tank.

He has been urging China to let the yuan rise more swiftly, something Washington says is vital for balanced global growth.

But People's Bank of China Governor Zhou said on Thursday evening: "External pressure has never been an important factor of consideration and we have never paid special attention to it.

"We mostly depend on our judgment ... to adjust the yuan's value independently," he said.

On the sidelines of the G-20 meeting, European policymakers may take the opportunity to discuss possible financial support for Portugal, which faces sharply increased borrowing costs.

A eurozone source told Reuters on Thursday that European Union states were increasingly concerned about Lisbon's ability to fund itself in financial markets and believe it will need to seek a bailout by April, following in the footsteps of Greece and Ireland.

German Finance Minister Wolfgang Schaeuble was quoted on Friday as telling Japan's Nikkei daily that Berlin was readily to support Portugal provided it adopted structural reforms but that it was not in a state of emergency.

© 2014 Thomson/Reuters. All rights reserved.

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