Korea welcomes a divided world

Ahead of this week's G20 summit in Seoul, finance ministers have been busy falling out over how to cure their economic ills. The omens are not goods
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The Independent Online

The Korean hosts of this week's G20 Summit may have to lay on soju, their tasty traditional rice wine, if they are to get the leaders of the world's major economies to get along when they gather in Seoul. For by the usually decorous standards of international economic diplomacy the overture to this summit has been disharmonious indeed.

"Clueless," the German Finance Minister, Wolfgang Schäuble, said of the Federal Reserve's injection of $600bn (£370bn) into the US economy. "Fighting debt with debt" was how the chair of the eurozone finance ministers, Jean-Claude Juncker put it. "Simplistic" was Russian President Medvedev's verdict on an American proposal to set a cap on nations' trade surpluses, already trashed by the Japanese and Chinese. "Good for the world as a whole" was President Barack Obama's response, and he was backed by the Indian Prime Minister Manmohan Singh, maybe only because the US vocally supports Indian claims for a permanent seat on the UN Security Council.

So the omens are not good. The world is drifting into the "currency wars" that the Brazilians warned about months ago. The Fed's "QE2", a massive second round of quantitative easing, was, as the Russians have complained, launched without any international consultation. As is now clear, America's policy-makers long ago abandoned faith in the G20 as a useful vehicle. So, for that matter, have the British. The shadow Foreign Secretary Yvette Cooper has bemoaned David Cameron and George Osborne's apparent liking for the bilateral over the multilateral. Yet if Ms Cooper had attended quite as many futile summits in airless rooms full of jet-lagged, exhausted leaders she too might tire of the G20. For it is not just the 20 largest and fastest-growing economies; it encompasses the IMF, the World Bank, the EU and nations the host fancies. The Canadians invited the Dutch; the Koreans wanted Singapore along; the Spanish usually turn up. Malawi will be there this week. And so on. The more national interests the less chance of finding agreement. The Chinese, meanwhile, just like to say no even if they are in the room with no one but the other half of the "G2", America.

That the Americans have reacted to this impasse in such a way ought not to have come as a shock. QE2 in effect means that the US has declared economic war, using the dollar as its weapon of mass destruction. If the Chinese will not revalue their currency voluntarily, and if China's rivals such as Korea and Indonesia refuse to do anything until China acts, then America will follow her usual unilateralist instincts. As America pumps more dollars into the system, the Chinese have an agonising choice: buy the dollars to keep their yuan competitive and their exports cheap, or allow the US dollar to collapse, robbing them of exports. The nuclear threat is to the $2,000bn plus of dollar denominated assets the Chinese hold. They might be relieved that the US has not turned more decisively to protectionism, but that is scant relief.

It was also perhaps no accident that the Fed's move followed the mauling that the US Treasury Secretary Tim Geithner received for his plan to cap trade surpluses at 4 per cent of GDP. The insults are still landing on that particular idea. Yesterday the German Chancellor, Angela Merkel, dismissed it almost as the work of a simpleton: "I don't think much of quantified balance of payments targets. It is not just a question of exchange rates, but also of competitiveness." In other words, "don't make us pay for your failures". Not suggestive of imminent harmony.

To add to this already difficult policy agenda the President of the World Bank, Robert Zoellick has weighed in with his own ideas – a role for gold as a "reference point" for a wider international system to constrain currency volatility. Mr Zoellick might have had the Plaza and Louvre Accords in the 1980s in mind. Yet the unintended consequence of these agreements was to see Japanese interest rates fall, and thus fuel the Japanese bubble, which of course duly burst. Getting currencies wrong can be extremely costly.

Thus far Mr Zoellick's plan seems to have found few takers, and it joins all the other failed initiatives to deal with the outstanding "global imbalances" since long before the G20 was invented as a wider, more relevant version of the old "rich man's club" of the G7/G8. The G7/G8, in turn, were larger versions of the original G5 that was formed in the 1970s – the US, Germany, Japan, France and the UK, to which Italy, Canada and Russia were added later (now joined by in the G20 China, India, Brazil, Korea, Saudi Arabia, South Africa, Indonesia et al).

Like money, international groupings seem subject to constant inflationary tendencies. But despite the shifting membership and exotic locations the first international economic summit of the modern age, the Rambouillet summit in 1975, had a strikingly familiar task to the one this week on Seoul – how to get the surplus nations of the world to act as "locomotives" of growth, pulling the others out of the doldrums. In those days it was Germany, Japan and the oil-rich Arab states; now we may add China and the other emerging powers. In the 40-plus summits since the agenda has not shifted so far.

The fear is that the Koreans will lack the diplomatic clout to bludgeon the egos into submission. The last time that happened was when the great clunking fist of Gordon Brown – and the view over the precipice into a full-blown global slump – forced the G20 act. That was in April 2009. It has not been repeated. Real progress, if any, will have to await the French chairmanship of the group next year. For now, we will have the usual photocall, with the novelty of David Cameron. Expect no more.

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