World leaders fail to find a balm for economic downturn

World leaders fail to find a balm for economic downturn

Leading to nowhere: President Barack Obama meets with the German chancellor, Angela Merkel, during the G20 summit in Seoul. NYT

President Barack Obama’s hopes of emerging from his Asia trip with the twin victories of a free trade agreement with South Korea and a unified approach to spurring global economic growth ran into resistance on all fronts on Thursday, putting Obama at odds with his key allies and largest trading partners.

The most concrete trophy expected to emerge from the trip eluded his grasp: a long-delayed free trade agreement with South Korea, first negotiated by the Bush administration and then reopened by Obama, to have greater protections for US workers.

And as officials frenetically tried to paper over differences among the Group of 20 members with a vaguely worded communique to be issued on Friday, there was no way to avoid discussion of the fundamental differences of economic strategy. After five largely harmonious meetings in the past two years to deal with the most severe downturn since the Depression, major disputes broke out between Washington and China, Britain, Germany and Brazil.

Each rejected core elements of Obama’s strategy of stimulating growth before focusing on deficit reduction. Several major nations continued to accuse the Federal Reserve of deliberately devaluing the dollar last week in an effort to put the costs of America’s competitive troubles on trading partners, rather than taking politically tough measures to rein in spending at home.

The result was that Obama repeatedly found himself on the defensive. He and the South Korean president, Lee Myung-bak, had vowed to complete the trade pact by the time they met here; while Obama insisted that it would be resolved “in a matter of weeks,” without the pressure of a summit meeting it was unclear how the hurdles on nontariff barriers to US cars and beef would be resolved.

Obama’s meeting with China’s president, Hu Jintao, appeared to do little to break down Chinese resistance to accepting even nonbinding numerical targets for limiting China’s trade surplus. While Lael Brainard, the undersecretary of the treasury for international affairs, said that the United States and China “have gotten to a good place” on rebalancing their trade, Chinese officials later archly reminded the Americans that as the issuers of the dollar, the main global reserve currency, they should consider the interests of the “global economy” as well as their own “national circumstances.”

The disputes were not limited to America’s foreign partners. Treasury secretary Timothy F Geithner got into a trans-Pacific argument with one of his former mentors, Alan Greenspan, the former chairman of the Federal Reserve, after Greenspan wrote that the US was “pursuing a policy of currency weakening.” Geithner shot back on CNBC that while he had “enormous respect” for Greenspan, “that’s not an accurate description of either the Fed’s policies or our policies.” He added, “We will never seek to weaken our currency as a tool to gain competitive advantage or grow the economy.”

Much of the rest of the world seemed to share Greenspan’s assessment. Moreover, Obama seemed to be losing the broader debate over austerity. The president has insisted that at a moment of weak private demand, the best way to spur economic growth is to have the government prime the pump with cheap credit and government stimulus programmes. He quickly found himself in an argument with Prime Minister David Cameron of Britain and Chancellor Angela Merkel of Germany.

“You do hear the argument made sometimes: If you have a deficit, put off the action to deal with it because taking money out of the economy will reduce your growth rate,” Cameron said. “I simply don’t accept that.”

Even as he spoke, back home his ministers were announcing new cuts in Britain’s famed welfare system.

Adamant Merkel

Merkel, in a more traditional German view reflective of her country’s history of hyperinflation before World War II, was equally adamant.

“I am not one, and Germany is not one, who says growth and fiscal consolidation are contradictory,” she said. “They can go together, and it is essential to return to a sustainable growth path.”

She also suggested that it was the job of deficit countries — like the US and Britain, although she diplomatically avoided citing them — to increase their competitiveness rather than put limits on countries that had figured out how to get the world to buy their goods.

“In the task ahead, the benchmark has to be the countries that have been most competitive, not to reduce to the lowest common denominator,” she said.

The differences with Cameron and Merkel were particularly striking because during Obama’s first Group of 20 meetings — in London, Pittsburgh and Toronto — he managed to get all of the major economies to pursue something of a coordinated stimulus strategy.

But that consensus began fracturing at the June meeting in Toronto. While the administration had warned that rolling back fiscal stimulus programs too quickly could endanger the fragile recovery, the pressure on European nations to slash their deficits was becoming overwhelming. Ultimately the Group of 20 countries committed to cutting government deficits in half by 2013, a goal that the US insists it will meet.

But much has now changed. Cameron is following his conservative instincts and has made budget-cutting a signature issue. Merkel is credited with avoiding spending heavily on stimulus programmes and emerging with the most successful recovery in Europe.
And Obama faces new political constraints. Jeffry A Frieden, a political scientist at Harvard, noted that the administration “feels it does not have the domestic political support for embarking on potentially difficult cooperative measures.”

The White House decided it was smarter for Obama to return home with no free trade accord than with one in which it could be accused of making concessions at a time that the consensus on trade has been shattered, particularly within the Democratic Party.

Similarly, accusations that China has manipulated its currency for its own advantage — and now the counter-charge that the Fed is doing the same — are part of what Frieden calls an argument over “who will bear the burden of adjustment.”

“Will it be the creditor or debtor countries?” he said. “Who’s going to take a hit for our debt?”

Indeed, the struggle for advantage, which ultimately may be a struggle to set the rules for a new global financial order, was the unspoken subtext of the meeting between Obama and Hu.

Hu, in the most indirect terms, told Obama that Beijing was focused on the Fed’s role in pushing down interest rates and its effect on weakening the dollar. The code words were obvious. For days Chinese officials have characterised the Fed’s actions as an effort to drive “hot money” to developing nations, pushing up their currencies and their interest rates, and perhaps fuelling inflation. Obama had hoped to make the meeting about a related subject: China’s continuing refusal to allow rapid appreciation of its currency, which fuels its huge trade surplus.

At a media briefing in Seoul, Zheng Xiaosong, director-general of the Chinese ministry of finance’s international department, indirectly accused the US of ignoring its international responsibilities.

“The major reserve-currency issuers, while implementing their monetary policies, should not only take into account their national circumstances but should also bear in mind the possible impacts on the global economy,” he said.

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