G20 inks economic pact, strikes IMF reform deal

At a meeting in South Korea, the growing clout of the developing world was recognised in a surprise deal to give them a bigger voice in the International Monetary Fund (IMF) which was charged with policing global stability.

Efforts by the United States to limit current account balances to 4 per cent of gross domestic product, a measure aimed squarely at China’s surplus, was shot down by a range of countries. The 20 members pledged in a communique to “refrain from competitive devaluations” of their currencies, developed economies vowed to cut their budget deficits over time and all to take action to reduce current account imbalances.

“If the world is going to be able to grow at a strong, sustainable pace in the future... then we need to work to achieve more balance in the pattern of global growth as we recover from the crisis,” US Treasury Secretary Timothy Geithner said.

US proposals to rein in current account imbalances came as Beijing has amassed $2.65 trillion in official currency reserves as a consequence of its huge trade surpluses, and prompted the US House of Representatives to pass a bill threatening retaliation unless China lets its currency off the leash. Chinese officials made no public comment on the dispute, but a G20 source said Beijing was opposed to any statement that explicitly bound countries to limits on current account balances or any other form of rules on currency policy.

Strains at the meeting that saw Japan and India shoot down the US proposals continued after it had finished. Germany said that there had been criticism of the US policy of flooding the banking system with money that has spilled over to emerging economies such as Brazil, causing asset price bubbles. “I tried to make clear in my contribution to the discussion that I regard that (easing) as the wrong way to go,” said German Economy Minister Rainer Bruederle.

“An excessive, permanent increase in money (supply) is, in my view, an indirect manipulation of the (foreign exchange) rate,” Bruederle added. Host South Korea however put a more optimistic spin on the outcome of the meetings saying the G20 had helped to remove uncertainty in global markets. “This will put an end to the controversy over foreign exchange rates,” said Finance Minister Yoon Jeung-hyun.