YOU HAVE to feel slightly sorry for modern diplomats. Whereas in 1944, Stalin and Churchill could carve up Europe on the back of an envelope, now, the leaders of the world’s twenty largest economies cannot even decide on the simple matter of financial reform. The G20 meeting, due to begin on Thursday, is looking like a non-starter.
Almost all commentators accept that there is a problem, but no one can agree on how to solve it. China, Japan and Germany all run immense trade surpluses, pushing down interest rates and destabilising the financial system. The burden of adjustment falls on debtor nations, like the USA, who so far, have not been willing to deflate. Thanks to that unwillingness, this meeting is looking like little more than an expensive South-Korean jolly.
It didn’t always look so bad. In October, US treasury secretary Timothy Geithner vowed to “work hard to preserve confidence in the strong dollar”, a statement that appeared to be an olive branch for China following a series of attacks on the Chinese renminbi. Many thought that some sort of agreement might be possible.
But with the announcement that the Federal Reserve will print $600bn of new money – more than anyone expected – that idea was blown out of the water. China and Germany have reacted furiously. The German finance minister, Wolfgang Schäuble, described the American economy as in “deep crisis”. On America’s part, many commentators have demanded a hard line against China over its alleged currency manipulation.
All of which has led currency traders to be exceptionally sceptical about the likelihood of this week’s meeting producing any solid achievements. Neil Mellor, a currency strategist at Bank of New York Mellon, says that the “G20 is set to be a disappointment”, with all currencies, except possibly the yen, looking “ugly”. Mellor suggests that the important question is which currency is “relatively uglier” – he suggests that it might be the euro.
According to Mellor, the dollar has been driven down over the last year by diversification strategies, as developing economies have sought to reduce the proportion of their foreign exchange reserves held in US dollars. That diversification has arguably gone as far as it can, however, and with murmurs of a renewed sovereign debt crisis emerging in Europe, it might well be time for the euro to lose its recent gains.
Nick Beecroft, senior foreign exchange consultant at Saxo Bank, is not convinced that the G20 will achieve much either. He points out that Timothy Geithner’s plan for a cap on current account surpluses “has been self-emasculated” by a lack of hard targets. China, for its part, seems more keen to avoid criticism than to make any real concessions.
For foreign exchange traders then, the G20 is looking rather like a non-event. Traders shouldn’t use this lack of activity as an excuse to take a nap, however. The problem of global imbalances is not going to go away, and eventually it will need to be solved. And sometimes big changes happen when no one is watching.