G20 Statement

October 24, 2010

G20 finance ministers and central bankers released a Communique after meeting Friday and Saturday.  The rhetoric goes further than most analysts, but the reaction of many market participants was unimpressed, critically negative and dismissive.  Some doubters believe the public sector is inept, duplicitous and corrupt in everything that it tries.  Because of the G20’s cumbersome size and lack of legally binding authority, others who might give government credit for doing good in certain instances are not about to do so in this case until they see positive results.

The statement calls the global recovery “fragile and uneven” with “downside risks” that vary “from country to country and region to region.”    The assertion is made that “uncoordinated policy responses will lead to worse outcomes for everyone.”  “clear, credible, ambitious, and growth-friendly medium-term fiscal consolidation” is urged in advanced economies.  Monetary policy is relegated to the task of promoting price stability, but an interesting omission is that the statement does not explicitly state that deflation is a greater risk in some countries than accelerating inflation.

Geithner’s call for current account targets made it into the text but in vague, unquantifiable terms.  Signers of the document promise to

pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels.  Persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process, recognizing the need to support our efforts towards meeting these commitments, we call on the IMF to provide an assessment as part of the MAP on the progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies.

If an enforceable mechanism to reduce external imbalances were actually put into practice, China would not be the only surplus country candidate for change.  Germany and Japan also must be squirming.  But this document does not carry the force of law.  For years, G7 finance ministers and central bankers met and included in their statement an urgent pledge to complete the Doha Round of trade liberalization.  Those words never went further than just words.  With many signs of rising dissension in the G20, the group will not be taken seriously until members in fact relinquish sovereignty over key elements of their domestic economy to the IMF or other world governments.  Many areas of policymaking take to time to implement.  Coordinated currency intervention and interest rate policy changes are two areas in which officials could follow up their statement with reasonably timely action.  But don’t hold your breath for that to happen.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



6 Responses to “G20 Statement”

  1. varun k says:

    sir,suppose if they go through cap-ing current account,which i know is unlikely but what effect can it have on say countries CURRENCY’S which have trade surpluses like china (6%),germany(4.9%)etc and trade deficit countries like australia(-4.4%)

  2. larrygreenberg says:

    The intent is to appreciate the currencies associated with excessive surpluses and depreciate currencies in countries with excessive deficits. It may not be necessary to have agreed numerical targets. In the early 1990’s, the Clinton Administration tried to impose numerical trade targets on Japan. The yen rose from around 125 per dollar when Clinton took office in January 1993 to nearly 101 seven months later. Despite correcting back in the final months of 1993, the yen rose subsequently to a record high of 79.85 on April 19, 1995.

  3. varun k says:

    Thanks Sir 🙂
    Have a gr8 day ahead!!

  4. Jimbo says:

    You mentioned China, Japan, and Germany – How does Germany go about toying with the Euro?

  5. larrygreenberg says:

    My point wasn’t that Germany is manipulating the euro. It’s that Germany has an excessive current account surplus. At over 5% of GDP, such has a considerably larger relative size than Japan’s. The divergence between the German surplus and big deficits in Spain, Greece and Italy is partly responsible for the strain on the euro area’s peripherals.