Seven of the world’s leading economies, including China and the US, faced deep scrutiny over fiscal and financial imbalances yesterday as the G20 announced a new framework for assessing potential risks to the global economy.
A G20 delegation member said that the seven “included the G5” — the US, France, the UK, -Japan and Germany — and “two big emerging countries,” suggesting China and India.
The move is intended to boost fraternal scrutiny in the G20 club, underscoring the growing worry over how structural problems in one large economy can spill across the world and pull others down — as became apparent in the 2008 to 2009 financial crisis.
The move fell short of the “name and shame” approach some observers expected, with members apparently uncomfortable with the idea of a public list of those found substandard by the new G20 guidelines.
Finance officials called the meeting a solid step forward in policing the increasingly integrated global economy, when policies by the biggest players have long been decided at the national level.
US Under Secretary of the Treasury Lael Brainard said there were already signs of how peer pressure was being taken, citing US President Barack Obama’s speech on Wednesday outlining an ambitious plan to cut the massive US budget deficit, and internal discussions the Chinese are having on their side of the problem — their massive trade surplus.
After discussions launched late last year, the G20 devised a framework to assess the most risky economies in a “very mechanical and very objective” manner, French Finance Minister Christine Lagarde said.
The G20 represents 85 percent of the global economy. The seven each had an economy equivalent to 4 percent or more of the global economy and were subject to tougher scrutiny.
Countries named to the list, will now be subject to a “second step” of assessment that could lead to policy prescriptions from their G20 brethren at a summit in Cannes, France, in November.
Lagarde stressed the use of a structural, data-based and historical approach and the absence of subjective judgment in the G20’s “indicative guidelines” for assessing risky imbalances.
Already cited by the IMF early this week for its yawning fiscal and trade deficits and growing debt burden, the US was an easy pick for the list.
The selection of China was a way of highlighting its contribution to the problem — its US dollar-pegged and widely believed to be undervalued currency, which has helped it build up massive trade surpluses, especially with the US.
“China should adopt a floating currency system,” Brazilian Finance Minister Guido Mantega said after the meeting. “My suggestion is a homogenization, in that everyone will adopt a floating currency.”
In a statement, the G20 also said it would more closely assess other problems with the global economy, including threatening capital flows, unhealthy reserve accumulation, skewed exchange rates and other symptoms of artificial or troubling imbalances.
“Our aim is to promote external sustainability and ensure that G20 members pursue the full range of policies required to reduce excessive imbalances and maintain current account imbalances at sustainable levels,” it said.
The G20 also took note of sharply rising commodity prices, including food, and the impact of excessive price volatility on food security.
The countries agreed on “the need for participants in commodity derivatives markets to be subject to appropriate regulation and supervision,” and called for more transparency in cash and derivatives markets.
However, the group noted that, despite soaring oil prices in the wake of upheavals across the Middle East and North Africa, and after Japan’s March 11 earthquake and tsunami disaster, there was no real shortage of energy supplies in the world.
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