Tensions over exchange rates, global economic imbalances and aggressive U.S. monetary easing form an inauspicious backdrop to the Nov. 11-12 summit of the Group of 20 major economies in the South Korean capital.
Following is the roadmap that the G-20 might take as it strives to put the world economy on a sounder footing and dampen the risk of a proliferation of currency and trade disputes.
WILL THE SEOUL SUMMIT BE DEEMED A SUCCESS?
The acrimony over currencies and trade policy is real.
But leaders already have two important accords in the bag that they will endorse and brandish as evidence that they are making the world safe from a re-run of the 2008 financial crisis that brought the world economy to the verge of collapse.
First, regulators have agreed on a comprehensive package of measures to phase in tougher capital requirements for banks so they could ride out a big shock without the need for taxpayer bailouts.
The G-20 will also approve a related menu of options on how to ensure the failure of a major global bank does not bring the entire financial system to its knees
Second, G-20 finance ministers last month agreed to a shake-up of voting power at the International Monetary Fund that gives more say to fast-growing emerging economies such as China.
The deal, ratified by the IMF board on Friday, will make the fund more representative, thus enhancing its credibility. IMF chief Dominique Strauss-Kahn called the change historic. G-20 leaders will surely concur.
WILL ROWS OVER CURRENCIES SPOIL THE ROSY GLOW?
If G-20 leaders seek in Seoul to highlight divisions over exchange rates and monetary policy, they will have an easy task.
Washington blames Beijing for holding down the yuan, China's currency, at a level it says is unfairly low, making it impossible for U.S. firms to compete in global markets and so destroying U.S. jobs.
China and other emerging markets counter that the Federal Reserve's plan to print money to buy U.S. government bonds to try to boost growth will send footloose capital pouring their way.
They fear the result will be to inflate asset bubbles and push up their exchange rates to uncompetitive levels against a dollar that can only depreciate. German Finance Minister Wolfgang Schaueble agrees. Last week he called U.S. policy "clueless."
But one of the purposes of international summits is to instill confidence in markets by putting on a show of cohesion.
So at a meeting of Asia-Pacific finance ministers in Kyoto at the weekend, it was noteworthy that U.S. Treasury Secretary Timothy Geithner backed away from a controversial proposal to put a figure on how big a surplus or deficit a country may run on its current account, the broadest measure of trade.
The question of underlying imbalances will probably still dominate debate in Seoul. But leaders are likely to kick the issue down the road by instructing their officials to work on defining "indicative guidelines" for current account imbalances — a lowest common denominator outcome that will allow everyone to claim victory — and asking the IMF to oversee the process.
DO PROTECTIONIST RISKS GROW IF THE G-20 SIDESTEPS BIG ISSUES?
Probability: likely, but within limits
Slow growth and high unemployment in the United States and most of Europe, coupled with a renewed rise in China's trade surplus, make a fertile breeding ground for protectionism.
Economic nationalism is in the air. Witness Canada's rejection of a $39 billion hostile bid by BHP Billiton for Potash Corp, or China's restrictions on exports of valuable rare earths.
Currency market intervention by Japan in September to hold down the yen, and capital controls imposed by Brazil and Thailand also smack of selfishness, purists say. The risk as they see it is of tit-for-tat responses that distort and destabilize markets.
"G-20 countries have to respect the letter as well as the spirit of the anti-protectionist pledges they have made," Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development (OECD), said.
Julian Jessop, chief international economist at Capital Economics in London, doubts that current account targets, while a good idea in many respects, would amount to much in practice.
"But without tangible commitments from the major surplus countries, a lurch towards protectionism and a global trade war will be increasingly likely," he said in a report.
Indeed, since their summit in June, G-20 governments have implemented 111 new measures that harm foreign commercial interests, bringing the total to 511 since the crisis began, according to Simon Evenett, coordinator of the Global Trade Alert monitoring group.
But Evenett, an economics professor at St. Gallen University in Switzerland, said protectionism had been contained so far.
"Recent currency disputes have not led to an outburst of across-the-board tariff protection, and countries with large current account surpluses have not been disproportionately targeted with murkier — that is, less transparent — forms of protection either," he said.
WILL THE PACE QUICKEN WITH FRANCE IN THE G-20 CHAIR?
France takes over the presidency of the G-20 after the Seoul summit and President Nicolas Sarkozy is itching to develop ambitious plans to reform the international monetary order. He also wants to make currencies and commodities less volatile.
"France's ambition is that everybody agrees to sit around the table to set down the bases of a new system that guarantees stability in the world," Sarkozy said last week after talks with visiting Chinese President Hu Jintao.
Sarkozy persuaded Hu to host a high-level seminar of experts on these issues early in 2011. The dollar's dominance irks both leaders, who arrived at a "real convergence of views" on the objectives to achieve, a French official said.
What short-term achievements are practicable is another matter: France has been unhappy with the dollar's hegemony since Charles de Gaulle was president half a century ago.
For a start, history shows that reserve currencies take a long time to lose their status. China has proposed the IMF's Special Drawing Right as an alternative, but most experts are dismissive. The SDR, they object, is not even a currency but the IMF's synthetic in-house unit of account.
As for tackling trade imbalances, if there was an easy solution, policy makers would have found it by now.
And the G-20 is such a broad, disparate group that the chances of a "grand bargain" of new policy commitments must be low — at least in the absence of a new crisis that concentrates the minds of leaders in a way that the collapse of Lehman Brothers did in 2008 and catapulted the group to prominence in the first place.
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