G-20 to launch drive to rebalance world economy

Longstanding disagreements over policy — particularly China's refusal to be rushed into appreciating its currency — mean that for now, countries are unlikely to decide on specific steps to narrow yawning trade and savings gaps between them.

Instead, finance ministers and central bankers of the Group of 20 nations, meeting in St. Andrews, Scotland on Nov. 6-7, will try to flesh out a commitment to subject national policies to international scrutiny and peer pressure in years ahead.

“At St. Andrews they can elaborate their leaders' framework, identify principles and a process, and assess how fast and where China is prepared to move first, and what it wants in return,” said John Kirton, a professor who studies the G-20 at the University of Toronto.

At their September summit in Pittsburgh, G-20 leaders announced they would by November launch “a cooperative process of mutual assessment” of national economic policies and their impact on global growth.

This could eventually mean a sea change in policymaking, as countries coordinated their policies to avoid the economic stresses which contributed to the global financial crisis.

To cut trade gaps, export giants such as China, Japan and Germany would be required to promote domestic consumption and rely less on foreign demand. Countries with big trade deficits, principally the United States, would boost their savings rates.

But a deadlock among G-20 countries over exchange rates, which could have a big effect in rebalancing trade, shows how hard it will be for the group to move ahead.

China allowed the yuan to rise gradually for a few years after 2005 but has kept it essentially flat against the dollar since the financial crisis worsened in mid-2008.

It has resisted making any specific commitment to resuming appreciation, to the point where the G-20 summit in Pittsburgh largely dodged the issue, merely issuing a vague call for “market oriented exchange rates that reflect underlying economic fundamentals”.

The signs are that the outcome of this month's G-20 meeting will be no different. A Chinese trade official said last week that China would not permit a big move of the yuan until its exports had recovered significantly; some analysts interpret that to mean early next year.

Europe and Japan have shown more tolerance to let their currencies strengthen; French central bank chief Christian Noyer suggested this week the euro zone could live with the pain if euro appreciation did not accelerate. The euro was “only slightly above its long-term average”, he said.

But countries do not want to be seen as encouraging appreciation, even if that would cut imbalances. Yoshihiko Noda, due to stand in for Japanese Finance Minister Hirohisa Fujii at St. Andrews, told Reuters last week that countries should avoid competing to weaken currencies, but this did not necessarily mean Tokyo accepted a strong yen.

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