The Group of 20 (G20) finance ministers’ agreement over the weekend is an important step forward on currency relationships and global rebalancing –- establishing a framework that is necessary to move forward in a constructive and cooperative way to resolve significant imbalances among major global economies, but it is not a magic wand resolving the underlying problems.
The communiqué recognizes that trade imbalances must be dealt with and that multilateral agreement is preferable to unilateral action. The communiqué contains a commitment for countries to move toward market determined exchange rates that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. (News coverage.) All that is to the good, and reflects hard work on the part of the U.S. Treasury.
The key, of course, is implementation of these principles and continued coordination, as large surplus countries like China and Germany need to increase domestic demand and move away from an economic model dependent on exports for growth, and large deficit economies like the United States and some European countries take steps to save and export more. This is not easy, as there are conflicting priorities within countries.
The next step is the G20 leaders’ conference in Seoul next month, at which the President needs to press for detailed commitments on implementation that build on this weekend’s agreement. In 2011, France takes the helm of the G20, and has already indicated that meaningful currency adjustment is a priority, so multilateral attention to global currency realignment will remain an important issue in the coming year.
In the meantime, the imbalances continue, and the major currency misalignment that virtually all agree on – the Chinese yuan – persists. In recent days the yuan has actually depreciated against the dollar rather than continuing to appreciate as promised.
The G20’s effort to obtain a multilateral solution to currency problems is essential, but it must not be a way of reducing pressure on China’s currency. While a new architecture is hammered out, the United States needs to be joined vocally by the other members of the G20 calling for China to accelerate its currency appreciation.
Pat Mears is the director of international commercial affairs for the National Association of Manufacturers.
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