Adrift in Seoul
Bickering Likely to Lame G-20 Summit
By Philipp Wittrock in Seoul, Korea
The days of close cooperation among the world's big 20 economic powers may have ended. With the economic recovery, displays of envy and egotism have reared up at this year's G-20 summit in Seoul. German Chancellor Angela Merkel is on a confrontation course with Washington over trade policy.
The plan concocted by South Korean organizers of the G-20 summit is cunning. Anything negotiators fail to agree on before the start of the actual G-20 summit on Thursday night in Seoul will be left off the table when the world leaders assemble. Anything! But please don't be upset. This summit, after all, is the first of its kind in an Asian country, and from a South Korean perspective it needs to be a major success.
For now, though, success looks very far off.
The global leaders are expected to finally pave the way for new equity capital rules for banks through the Basel III proposal and the reform of the International Monetary Fund. But the progress in the financial market regulations and the staged harmony won't be able to cover over the fact that a shadow is hanging over this summit.
At the height of the financial crisis, this club of the most powerful industrialized nations presented itself as a body that would close ranks and react swiftly to distortions in world markets. Now that the economy has recovered in many areas, though, the pressure to cooperate is sinking and egoism seems on the rise. Instead of unity and resolve, the order of the day is distrust and bickering. Disputes over issues like global disparities in trade balances, or alleged currency manipulation, or unfair competitive advantages have marked this year's summit, and at the heart of the conflict are the United States, China and Germany.
Palpable attempts at verbal disarmament -- which US President Barack Obama put in writing, again, in a letter to his summit colleagues -- have not amounted to much. Washington has accused governments with large trade surpluses of seeking growth in their own economies at the expense of other nations. The criticism has been directed largely at China and Germany -- two nations upon which the US would like to impose export limits and oblige Beijing and Berlin to spur domestic consumption.
Tone from Washington Rubs Merkel Wrong Way
The harsh tone used by US Treasury Secretary Timothy Geithner recently in making the American case has led to resentment in Berlin and Beijing. For German Chancellor Angela Merkel, such an aggressive negotiating style is a non-starter. She realizes that anyone who declares lofty goals in such a vigorous manner can quickly wind up the loser.
World leaders looking for a fight, though, may find one with Merkel. She dispatched her finance minister, Wolfgang Schäuble, and economics minister, Rainer Brüderle, to argue against the Americans' demands. Then she personally made clear that Germany would not be yoked to any sort of export quotas at the G-20 summit. Speaking at the Business Summit, a meeting of top executives held on the sidelines of the G-20, Merkel said fixed upper limits for trade surpluses or deficits would be "neither economically justified nor politically appropriate." Moreover, she said, they "would be irreconcilable with the goal of free global trade."
Indeed, the summit's final resolution paper will include no concrete numbers to shape a firm framework to resolve imbalances in world trade. Negotiations over the final formulations are scheduled for Thursday, and the understanding around Seoul is that they'll be very tough.
Notably, Merkel left Germany with well-rehearsed words of praise for the Chinese. They've shown exemplary engagement with Europe, she said, and they've proven to be a "good companion for our budgetary policy." Of course, Berlin would rather stand shoulder-to-shoulder with Washington. But the unspoken message was clear: Drive us into a corner, and we'll find other powerful allies.
So in Seoul, the Americans appear to be on trial. They haven't yet brought their economy into line and they still sit on a gigantic state deficit of $1.3 trillion (just under €1 trillion). Washington is a long way from halving its deficit -- although that was the goal it announced at last year's G-20 summit. Last but not least, of course, the US Federal Reserve announced Friday that it would take the controversial step of buying up to $600 billion in American treasury notes. These massive purchases of its own government's sovereign debt amount to a policy, by the Fed, of printing money.
The Germans were not alone in complaining that Washington wants to artificially depress the value of the dollar with this glut of new cash (in order to grab an unfair advantage in the world export market). And Washington pursued this course right after criticizing Beijing for holding the yuan artificially low.
A Truce, Instead of Results?
There's enormous concern in Seoul over a currency war, as well as the spectres of increased protectionism and proliferating levels of debt financing by G-20 governments. "No one has an interest in new financial bubbles," Merkel warned Wednesday. China reacted before the summit in typical fashion. The largest Chinese rating agency downgraded America's credit rating, in a symbolic gesture, while China's own currency received a sharp upgrade.
At bottom it's a clash of principles, and a resolution isn't yet in sight. Now that the G20 format has proven viable in a crisis, the assembled leaders have to show a will to protect the world economy from new downturns and to work for lasting, just and balanced growth. This calls for more tightly coordinated economic policy. Merkel, among others, will hope for signs of cooperation from other governments at the summit. But the most positive likely outcome is -- for now -- a truce.
Merkel landed in Seoul on Thursday morning and met with South Korean President Lee Myung-bak and Prime Minister Kim Hwang-sik. In the afternoon she received an honorary degree from Ehwa University, the world's largest institute of higher learning for women. Her day just was a warm-up for the brass-tacks meetings on Thursday. Before the 20 world leaders gather for dinner, Merkel will have a one-on-one talk with President Obama, where she'll presumably tell him what she thinks about Washington's attacks on the world's second-largest export nation -- Germany -- and about the Fed's new dollar glut.
Namely, nothing.
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