The world’s major economies agreed on Friday to subject themselves to regular tests to detect imbalances that could upset the stability of global trade.
The G20 has debated measures to reduce trade deficits and corresponding surpluses, assuming that the spendthrift of some, particularly the United States, and the reliance of others, notably China, on such excess consumption was one of the root causes of the global financial crisis of 2008.
China, France, Germany, India, Japan, the United Kingdom and the United States would face special scrutiny under the new arrangement as they each account for 5 percent or more of the G20’s total economic output.
The group would not have the authority to force its members to adjust their trade policies if imbalances are detected. Rather the situation is referred to the International Monetary Fund which would conduct another study of a nation’s balance of trade before making recommendations.
France, which chairs both the G8 and the G20 this year, hopes to have a system prepared for full implementation ahead of a meeting of government leaders in Cannes during the fall.
Earlier this year, the G20 discussed which indicators to monitor. China was at the time opposed to the inclusion of foreign exchange issues but the group agreed on three broad parameters:
- Public debt and fiscal deficits;
- Private savings and private debt;
- Trade interactions, including the merchandise trade balance and net investment flows.
China reported this week that its foreign exchange reserves had topped $3 trillion. In the years leading up to the crisis, much of this cashpile was invested in Western markets and supposedly helped fuel excessive risk taking in financial markets.
The United States claim that China saves too much and spends too little because it keeps its currency undervalued against the dollar. China in turn has criticized the Federal Reserve’s policy of quantitative easing and believes it is a cloaked method of driving down the exchange rate of the dollar to artificially enhance American competitiveness.
Many developed nations also worry that the fiscal crisis in the United States could eventually trigger another financial panic. The Obama Administration is likely to point to its most recent proposal for deficit reduction which would cut $4 trillion in federal spending over the next twelve years.
Last year’s G20 summit in Canada agreed to halve public deficits by 2013 — a target Washington may be unlikely to reach.
Germany, too, runs a trade surplus but Europe’s position is that the seventeen nations of the eurozone should be examined as a single bloc. The surpluses of Germany and other northern countries, especially the Netherlands, are offset by deficits in peripheral economies, including Italy and Spain, leaving the eurozone as a whole largely in balance.