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The heads of government meeting this week in Los Cabos in Mexico will be occupied with the crisis in the eurozone, where there are plenty of internal imbalances but – at least for the moment – no ability to resort to exchange rate movements to correct them.
Globally, although disputes over trade and protectionism are rising, the unproductive clashes over currency that disfigured previous G20 meetings have eased. A combination of events and policies have combined to reduce exchange rate misalignments and taken heat out of the issue.
The two loudest complainants about currencies were the US and Brazil, and both have had reason to moderate their criticism. The US continues to argue that Beijing should allow the renminbi more freedom to rise, but falls in China’s current account deficit have heavily reduced independent estimates of its undervaluation.
Calculations published in May by William Cline and John Williamson at the Peterson Institute for International Economics in Washington, based on new current account forecasts from the International Monetary Fund, suggest the renminbi is now much closer to its sustainable equilibrium rate.The authors found the renminbi undervalued by just 2.8 per cent in real trade-weighted terms and by 7.7 per cent against the dollar, compared with undervaluations of 16 per cent and 28.5 per cent respectively last year.
Nor is it purely a China story. Mr Cline and Mr Williamson found the average currency misalignment in the world’s major economies, weighted by their GDP, at its lowest since they started producing regular estimates in 2008, falling from a peak of 8.4 per cent in 2009 to 2.6 per cent now.
Brazil, for example, another of the chief aggressors in the currency wars – and which criticises loose US monetary policy as well as Chinese currency intervention – has seen the real fall by a quarter against the dollar since last summer. The estimates suggest substantial misalignments are now largely confined to a handful of smaller economies including Australia and New Zealand (overvalued) and Taiwan and Malaysia (undervalued).
While the rhetoric about China stealing American jobs continues on Capitol Hill, the threat of Congress passing a tough law to punish Beijing for currency undervaluation this year has also receded. Derek Scissors, who follows Asian economies at the conservative Heritage Foundation think-tank, says that while a bill will probably be introduced later in the year, it is unlikely to find speedy consensus.
“Noise is not irrelevant,” Mr Scissors says. “But the process has started too late. It was an important signal to say that ‘we didn’t think this was important enough to bring up in May’.”
For several reasons the currency wars retain the potential to flare up again, particularly if the global economy continues to weaken and unemployment stays high in the rich countries.
Forecasts of smaller current account imbalances may not materialise, and nor have the economic patterns that gave rise to them been permanently changed. China’s falling current account surplus in recent years has a lot more to do with a surge in domestic investment soaking up more of its giant pools of domestic savings than it does with a permanent reorientation towards import-friendly consumer demand.
In recent months, having appreciated steadily since mid-2010 – and risen even more in real terms, thanks to higher Chinese inflation – the renminbi has largely flatlined against the dollar.
And the issue remains politically sensitive in Washington, with both Mitt Romney and Barack Obama competing to out-bash China in the run-up to the presidential election in November. The US Treasury, which has consistently declined to label China as a currency manipulator, continues to draw as little attention to the decision as possible. Last month it repeated last year’s trick of sneaking out the latest version of the twice-yearly currency report on the Friday before the Memorial Day long holiday weekend.
But for the moment, the G20’s discussions on economics can focus on the truly catastrophic events in Europe rather than the merely perilous global imbalances of the summits of years gone by.
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