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G20 leaders grapple with risks of reduced US monetary stimulus
By George Parker, Courtney Weaver and Charles Clover in St Petersburg
Leaders at the Group of 20 summit were on Thursday grappling with the risks posed by a potential reduction of US monetary stimulus and worries over trade protectionism amid a shift of economic momentum towards advanced economies.
After years of agonising over sluggish growth in the developed countries, G20 leaders confronted fears that turmoil in some emerging markets – including India – posed a serious new threat to global growth.
China entered the intensifying debate over the global impact of the US Federal Reserve’s monetary policy on Thursday, when it urged the world’s largest economy to be “mindful of the spillover effects” as it weighs reducing its support for financial markets.
Amid fears that the tapering of US quantitative easing – a policy that led to a flood of capital into emerging economies – will cause serious disruption, G20 officials were working overnight on the delicate task of framing communiqué language on the issue.
The US argues that it will only withdraw QE when its labour market has improved to a certain level and the economy is growing strongly enough. A US official said at a briefing that strong domestic growth is good for the global economy, and that the government believes that “there are different things that each country can do here within the G20 framework to invest in economic growth”.
But with the prospect that the start of tapering is close, emerging markets have suffered worrying declines, leading Zhu Guangyao, China’s deputy finance minister, to add to recent remarks by other emerging economy top officials in arguing that the US has a responsibility beyond its own domestic economic concerns.
“We hope that as the issuing country of the largest reserve currency in the world the United States should be mindful of the spillover effects of its macro economic policies,” Mr Zhu said on Thursday, adding that he hopes all G20 members will strengthen co-ordination and be aware of the impact of their own policies.
Mr Zhu added that balance of payments problems in the developing world are partly due to lack of economic reform. This was echoed by a British official who said that emerging economies had been pumped up by cheap money from the advanced countries, disguising the need to follow through on fundamental reforms in some countries.
Ben Rhodes, a White House official, responded to criticism of the Fed’s handling of quantitative easing “I think that what has been demonstrated is we’ve pursued a pro-growth policy, and we believe that that ultimately is good for the global economy, because when the US economy is growing it helps provide momentum more broadly” he said
Currencies of countries such as India, Indonesia, Turkey and Brazil have been under particular pressure because of their current account deficits. To address the risks ahead, the Bric group of emerging economies – led by China – will contribute $100bn to a fund that once functioning would aim to stabilise foreign exchange markets. The amount is smaller than originally expected and there was not much more detail apart from the amount.
Analysts said it was still far from clear that the fund would have the firepower or the mechanisms to counter a full-blown crisis in emerging markets, but added that the political incentive for its members to build an effective institution were strong.
“If any one of these countries was hit by a significant speculative attack, this would run dry,” said Ulrich Leuchtmann, strategist at Commerzbank, but added that China – which has committed $41bn even though its own currency is not freely traded – had both a geopolitical interest and an economic interest in preventing turbulence among key trading partners.
The recent turmoil in emerging markets has prompted an about-turn by the International Monetary Fund over its view on the global economic outlook. In a note produced for the G20, the IMF dropped its view that developing economies were the dynamic engine of the world economy, saying instead “momentum is projected to come mainly from advanced economies, where output is expected to accelerate”.
Meanwhile there were fears that further imbalances between advanced economies and emerging markets could spark more protectionism, after the European Commission found that 154 new “trade restrictive” measures were introduced across the world last year. While the EU and Canada edged closer to a long-awaited free-trade deal, Argentina and Brazil were attempting to water down G20 language on protectionism.
G20 officials were trying to get agreement to ban further protectionist measures until 2016, but Argentina and Brazil have tried to bring forward that date to allow them more leeway to erect trade barriers. Both countries declined to comment.
One western G20 official said protectionism was “the dog that didn’t bark” following the 2008 crash, but there were fears that it might re-emerge in countries hit by the backwash of the US and other countries tightening monetary policy.
José Manuel Barroso, head of the European Commission said: “This summit should confirm the G20’s commitment against protectionism,?.?.?.?and do more to roll back trade-restrictive measures. Almost 700 of these measures have been taken since 2008 and only very few have been rolled back. This trend is very disappointing and dangerous.” |
