It appears that the global currency system won't be reformed any time soon, despite all the talk from international officials. The summit of G20 finance ministers and central bank representatives held last week in Paris was further evidence of the inertia in the global economy. Ostensibly, the purpose of the meeting was to discuss reforming the currency system, but the finance officials could only agree on the need to create a system of indicators to reveal weak spots and imbalances in the global economy.
A child of the crisis
The G20 rose to prominence during the global financial and economic crisis. The global challenge demanded a global solution. But the group of the world's twenty largest economies has so far failed to prove itself as an effective regulator of the global economy. When the crisis was at its peak, G20 heads of state and international officials tried to hash out an agreement on a coordinated response, but each nation ultimately pursued a recovery policy that best suited its interests. So no one is expecting any breakthroughs from the G20.
Finance officials continue to haggle over who is to blame for the numerous, persistent risks to the global economy. The economy is still unstable, and markets are becoming increasingly volatile. And yet the developed and the developing worlds are worlds apart on how to address the lingering problems.
Nor has meaningful progress been made toward the creation of a new global financial system. The United States and other advanced countries seem intent on continuing their policies of monetary stimulus. The U.S. Federal Reserve System is carrying out a program to pump $600 billion into the U.S. economy by buying up treasury bonds.
This anti-crisis liquidity injection has come under considerable criticism around the world. Critics contend that a considerable portion of the new liquidity is being used by financial institutions for speculation, and that the flow of speculative capital around the world endangers the economies of the developing countries.
What's more, these measures preserve the status quo in the global financial system rather than encourage the formation of a new one.
Monitoring the problem
The main achievement of the Paris forum was a tentative agreement to develop a system of indicators that would alert officials to imbalances in the global economy, in particular, the risk of bubbles. This system is intended as a first step toward sustainable economic development and a way to avoid conflicts like the currency wars that shook the economy last fall. The list of indicators includes budget deficit, foreign debt, private savings, current accounts balance and trade balance.
Two more indicators were supposed to be included in the agreement - national currency exchange rate and foreign exchange reserves. But Brazil and China objected.
China has the largest foreign exchange reserves in the world, valued at $2.7 trillion, and it is very sensitive about anything related to exchange rates. It takes umbrage when its trade partners (especially the United States) push for a change in China's currency policy. China is looking out for its own interests. A weak RMB makes Chinese exports even more competitive on the world market. China's main trade partner, the United States, has insisted for years that China allow its currency to appreciate to eliminate its unfair export advantage. Ultimately, the finance ministers agreed that the last two indicators will not include concrete figures.
There is still much to be done before this economic monitoring system starts functioning. For instance, thresholds for the indicators must be established, and an appropriate course of action in the event that they are exceeded must be worked out. It is not clear when this will be accomplished. The participants in the forum have agreed only to continue debating the system of indicators in the spring.
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