The world’s leading finance ministers and central bankers overcame Chinese objections at the weekend to strike a compromise deal meant as a first step towards tackling global economic imbalances.
France secured agreement at a Paris summit of the G20 group of countries on indicators that would be monitored to avert future economic crises. But China successfully blocked greater scrutiny of its massive foreign exchange reserves and the use of exchange rates as an indicator.
Christine Lagarde, French finance minister, said the negotiations had been “frank, at times tense” but nevertheless amounted to a step forward towards greater global co-ordination of economic and fiscal policies.
Separately the meeting reacted to the unrest in the Middle East by agreeing to “stand ready to support Egypt and Tunisia”. Under pressure from G20 members including Saudi Arabia and China, however, the ministers stopped short of stronger language supporting democracy.
Ms Lagarde said the economic imbalance indicators would include domestic policies of all the G20 members, including public sector debt and deficits and private savings rates, as well as external imbalances “composed of the trade balance and net investment income flows and transfers”.
The choice of words, negotiated by senior officials throughout Friday night, was apparently to avoid any reference to “current account” imbalances – another Chinese objection. And instead of singling out exchange rates as a specific indicator, the ministers agreed merely to “take due consideration of exchange rate, fiscal, monetary and other policies.”
According to officials closely involved in the negotiations, China was virtually isolated from the beginning of the meeting. At one stage all reference to exchange rates was removed from the text to reassure Beijing, but reinserted at the insistence of countries including the US, Germany and the UK.
Ms Lagarde, who chaired the meeting, said the indicators would be used “to test economic policies and determine how good they are for all member states, and not only for the domestic policy of a given country.”
Welcoming the agreement, Tim Geithner, US Treasury secretary, said the world still needed to “establish stronger norms for exchange rate policies”.
“There is broad consensus that not just Europe, Japan and the US, but also the large emerging economies need to allow their exchange rates to adjust in response to market forces.”
Despite the obvious compromises, Jean-Claude Trichet, European Central Bank president, said the G20 indicators were “capturing what was needed to be effective … there is no doubt what we are aiming at”.
Saturday’s deal paves the way for the next stage in the process, to draw up “indicative guidelines” for each of the selected economic indicators, but not precise targets, to warn of the re-emergence of severe imbalances between the G20 members. A deadline of April has been set for agreement on such “benchmarks”, and the International Monetary Fund has been instructed to provide a G20-wide assessment of policies by October.
Deadlock threatened the weekend talks after Xie Xuren, China’s finance minister, on Friday rejected the idea of monitoring real effective exchange rates and foreign exchange reserves.
Wolfgang Schäuble, German finance minister, who was equally opposed to any precise targets to limit the trade surpluses of export-led economies, played a key role in persuading his Chinese counterpart to accept a compromise, according to officials close to the talks. Canada and India co-chaired the working group seeking to negotiate a deal.
Meanwhile, the UK took comfort from a reference in the communiqué to addressing “expeditiously” the issue of all systemically important banks – those considered “too big too fail” – once a framework had been agreed for those with a global reach. The UK government had feared the globally orientated City of London would be put at a disadvantage.
On the Middle East, the communiqué pledged responses to Egypt and Tunisia at the “appropriate time,” designed to benefit “the whole population and the stabilisation of their economies”.
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