G20 meeting credibility test for most powerful states

THE G20 meeting that began in Seoul in the early hours of this morning will be a credibility test for the world’s most powerful countries, warned European Commission President Jose Manuel Barroso.

The leaders must show they are able to move from crisis response mode to developing a structured medium term response to the macro-economic imbalances, he said.

So far, preparations for the meeting in Korea have been dominated by deep tensions over the global economy, and especially by the latest round of US quantitative easing.

While it has taken some of the heat off China, Mr Barroso was addressing both the US and China in a letter to the G20 urging the G20 to “allow exchange rates to be set in line with market fundamentals and to refrain from competitive devaluation of currencies”.

There are fears that other countries may be tempted to weaken their currencies. The euro is already suffering and has risen against the dollar as a result of the US Federal Reserve decision to pump $600 billion into the American economy.

The EU sees the move as a form of protectionism and is anxious to hear what US President Barack Obama has to say and if he was informed in advance of the Fed’s decision.

“Their action has fuelled currency tensions and this is detrimental of the recovery — we must avoid any kind of protectionism and quantitative easing can be a form of protectionism,” said the EU official.

The EU would like to see some kind of peer pressure exerted among G20 members and have them accept “soft surveillance” to coordinate economic policies in general.

The EU sees the G20 as a recognition of the interdependence of the world’s major economies, and believes, before major decisions like QE are made, that there should be some kind of consultation among central banks.

While EU officials believe it is important for China to take into account trade and investment when deciding on the strength of its currency, Germany, which also has a current account imbalance, does not want to see any kind of ceiling imposed.

Mr Barroso is anxious to see a framework for growth set out among the G20 nations that includes further work on financial reform and on the trade and development items placed on the agenda.

While the EU is very advanced in terms of agreeing to coordinate budget strategies, it would like far more information sharing among the global blocs that could allow for peer pressure to be exerted.

Europe has agreed to give up two seats on the IMF’s 24-seat executive board to the emerging economies. This will give China a more powerful role and raise the clout of Brazil, India and Russia.