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article imageOp-Ed: If G20 fails so be it but G2 must succeed

By Michael Cosgrove     Nov 11, 2010 in Politics
The world’s biggest economies have begun the G20 meeting in Seoul and the intensifying ‘currency war’ between America and China must be addressed before all other issues, including G20 President Sarkozy’s ambitious world economy reform plans.
This summit was supposed to be Nicolas Sarkozy’s chance to try and persuade world leaders to accept changes in the way the world economy and markets work. France would like to see the world’s richer economies introduce formal mechanisms to reduce the dramatic and volatile fluctuations in exchange rates and basic commodity prices, such as wheat, which he says are partially responsible for speculation and the economic imbalances we are seeing today. He would also like to see the introduction of a tax on market transactions.
Another project involves the widening of G20’s responsibilities to include issues such as the impact of climate change on economies and economic development.
Although Sarkozy’s efforts are laudable in principal they are also fatally flawed because of their ‘French approach’ to issues, which is based upon principles of state and G20 intervention, protectionism and legislation, excesses of which both China and America will not permit under any circumstances. Also, the sheer size of the task he has set himself may well be the reason he will fail. However it must also be said that his G20 agenda has found a lot of support in France and he knows that if he fails at least he will be credited for having tried, that which will not hurt his 2012 reelection chances, particularly if he accuses America and China of sabotaging his plans.
It could even be argued that it doesn’t really matter of G20 doesn’t work out for Sarkozy as long as progress is made on the biggest single issue, that of how to resolve the major differences over currencies which are poisoning the world economic atmosphere and will lead to turmoil if they are not reconciled.
The three main trading blocs are America, China and Europe. However, divisions within Europe have resulted in a lack of a coordinated effort to bring it the Euro down, with individual countries’ interests coming first. Germany has a surplus economy and is reluctant to accept a real stimulus package for the Euro as it fears inflation, France sees things in terms of protectionism, and the need to shore up deficit economies like those of Greece, Spain and Portugal are narrowing the options. Opinion is divided on whether the Euro should be artificially devalued and if so to what extent, but nobody doubts that Europe is falling behind.
Worse, Europe’s inefficiency is leaving the door wide open to what it fears most – a G2 duopoly consisting of America and China. European anger at this possibility is being expressed by many analysts and economists alike. That sentiment was aptly summed up in a recent article in Le Figaro which slams American “selfishness” and Chinese “duplicity.” That may or not be true but one thing is certain, and that is that Europe has found itself sidelined and the Chinese and Americans must find ways to absorb their trade imbalance if they want to be in a position to create a future world economy which would be primarily based on their economies. Failure to do so would not only be catastrophic for them, but for the rest of the world too.
The broad reasons for the ongoing “currency war” between the Yuan and the Dollar are well-known. American deficits are being financed by Chinese surpluses, and although this is keeping the weak American economy afloat it is not likely to move it forward unless China gives it some more rope in the form of a stronger Yuan, which would encourage American exports and jobs. America does not want to adopt an austerity economy because of fears of inflation which would be fueled by the Yuan.
But it is precisely because it is a surplus economy that China is unwilling to budge on the Yuan, fearing for its own exports even though it agrees in theory that the most effective single step forward would be an ‘arrangement’ which would suit both them and the Americans.
American complaints about huge Chinese surpluses at a time when the Chinese economy is booming compared to a weak American recovery did lead to China to de-peg the Yuan from the Dollar in June, but the extent to which it did so was deemed to be insufficient, not only by America but by the rest of the world as well.
China’s defense is that over-strengthening the Yuan could seriously affect its exports and its economy.
That situation led to the recent injection of a massive $600bn into the American economy as a “quantitative easing” (QE) measure designed to devaluate the dollar, help kick start jobs and promote growth. The move is also designed to force the Chinese to either devalue the Yuan or risk seeing the world flooded with excess liquidity which would then oblige a currency reevaluation.
In other words, America and China are fighting a currency war with each country using the weapons at its disposal, but if this situation is allowed to deteriorate much longer the result could well be a worldwide recession which would suit no-one at all.
America and the Dollar no longer dominate the world economy as they did before but they cannot be allowed to fail either. China too must be encouraged to continue its economic progress.
But that will only happen if there is a compromise. China must be persuaded to let the Yuan rise in order to give world exports a chance to breath and America would be very badly-advised to continue printing money to dope the world economy. Action to reduce the present tension on currency needs to be coordinated and simultaneous and both countries must be persuaded that 50% of some progress would be far better than 100% of none. This issue will not be fully resolved at the G20 summit, but the summit must concentrate all its efforts on laying the foundations of an agreement which is desperately needed. And that means that Nicolas Sarkozy will have to wait a while before trying to reform the broader system in one fell swoop.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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