Concessions are the key

In Gyeongju three weeks ago, G-20 finance ministers and central bank governors basically reached an agreement on a transition to a market-determined foreign exchange system and restraint on competitive depreciation of currencies. But major countries of the G-20 moved in the opposite direction. The United States wants a second-round of quantitative easing, while China balks at an appreciation of the yuan. The U.S. argued that a strengthened U.S. economy would help the global economy recover, but China, Germany and Brazil all criticized the move as an “indirect manipulation of exchange rate.”

A sharper rift was found in the proposed guidelines on current account balances. Strong exporters like China and Germany opposed the idea of such a guideline itself, while the U.S. rebutted by saying that an early-warning system is necessary for those countries with an exorbitant surplus or deficit in their current account balance. Unless both camps can reach a compromise, the expected Seoul consensus may fail.

No G-20 leaders are against the need to finalize the agreement reached in Gyeongju. They agree with the principle that international cooperation is necessary to address the exchange rate and trade imbalance issues. They also agree on the solution: the U.S. should increase its exports and China should expand its domestic consumption. But they are fighting because they disagree on the details of the exchange rate solution and guidelines on current account balances. In other words, as long as they seek to solve their differences through concessions and compromise, an agreement is possible.

The G-20 leaders should not withdraw from their agreement in Gyeongju. The only solution for achieving coprosperity of the global economy is to strengthen the agreed-upon market-determined exchange rate system and let go of the idea of a competitive currency depreciation. If they can’t reach an agreement, we may have to leave the job to the G-20 Summit in France next year. Still, the Seoul summit should minimize the obscure areas as much as possible by, for example, setting a deadline for a final agreement on the tricky issues and having each member ready a plan for action.

There aren’t many hours left before the summit is over. We urge all participants to do their best until the last minute to achieve some meaningful results this time. The G-20 has already become a top venue for multiparty consultations on the development of the global economy.