Tags: Finance Ministers

France: Global Imbalances Risk Causing New Crisis

Friday, 18 Feb 2011 09:30 AM

The world's strongest economies will find themselves in a new crisis if they fail to address the dangerous imbalances in the world economy, France's finance minister warned Friday.

But Finance Minister Christine Lagarde also recognized that governments, which have sought starkly divergent paths out of the financial crisis, have "vested interests" that could endanger agreement. She spoke as finance ministers and central bank governors of the Group of 20 industrialized and fastest developing nations gathered for their first meeting this year in Paris.

The status quo of some countries building up huge surpluses while others run steep deficits "leads us straight into the wall of another debt crisis," Lagarde said at a financial conference that kicks off the G-20 meeting.

The world's top financial officials hope to draw up a list of indicators that best measure dangerous imbalances in trade deficits, surpluses, budget deficits or levels of debt. Inflation and national savings rates are also likely to be considered as part of the range of possible yardsticks.

"We will focus on how to use those indicators to achieve better collaboration and cooperation," Lagarde said, adding that the G-20 meeting hosted by France would be about "more stability, less volatility, less excesses, and world governance."

Lagarde has the difficult task of picking up the pieces of last November's G-20 summit of heads of state in Seoul, which ended without any meaningful agreement on how to defuse long-standing tensions over trade and currency imbalances.

Her warning of the danger of imbalances was echoed by U.S. Federal Reserve Chairman Ben Bernanke. In the years before the financial meltdown of 2008, countries with trade surpluses plowed money into mortgage and other investments in the United States, helping escalate their value, Bernanke said in his speech at the conference.

The Fed chairman called on surplus countries like China to let their exchange rates float freely, and urged nations like the United States needed to narrow their budget shortfalls and save more.

"If there is no stabilizing system, then you can have situation where like today, you have a two-speed recovery and demand is not optimally allocated around the world," Bernanke said.

Emerging markets like China and Brazil have emerged from the financial crisis much stronger than some of the more traditional powers such as the U.S, Europe and Japan.

While there is widespread agreement among financial policymakers that smoothing out imbalances is key to getting the global economy back in track, how that should be done is more divisive.

The mere existence of the imbalances points to vastly different growth models among the world's biggest economies, with each arguing that changing its strategy — whether based on exports, exchange rate controls, or the free flow of money — would hurt its recovery.

Officials will not even get to the more difficult question of setting thresholds for these indicators. The even more tricky question of how to enforce any thresholds that leaders eventually sign up to is yet further off the agenda.

"Name and shame" policies like those used in the fight against international tax havens would be one, albeit toothless, possibility.

Lagarde said reducing imbalances will "require cooperation, understanding of each other's positions and vested interests." She said the talks on Friday and Saturday should help G-20 members "move from understanding to cooperating and collaborating." Finance ministers will meet several more times this year before France's G-20 presidency culminates with a heads of state summit in Cannes in November.

"It's going to be quite a task, but that's where we need to go," Lagarde said

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