Geithner talks to the G20 but aims at China
Considering its current economic woes, some might wish the United States would focus on its problems before it instructs its G20 partners on how the world should be run. Yet U.S. Treasury Secretary Tim Geithner raises important and difficult topics in a letter to his colleagues ahead of their weekend meeting in South Korea. The most difficult and contentious is on the global divide between “surplus” and “deficit” countries. But Geithner clearly aims at China’s destabilizing use of its fixed exchange rate.
Geithner might start, however, by listening to his own advice. The prime example of a deficit country is the United States, which is still running massive fiscal and trade deficits. What’s required, says the treasury chief rightly, are “credible medium-term fiscal targets”—of the kind that have just been adopted in the UK, but are yet to be taken on in the United States.
Geithner’s remarks needle more, however, because he finds fault, too, in “surplus” countries such as Germany and China. Angela Merkel, the German Chancellor, is planning to eliminate a budget deficit that looks trivial by U.S. standards. But that’s wrong, Geithner seems to suggest, because it’s the responsibility of “surplus” countries to boost growth and global demand. But Germany’s population is ageing, and its exchange rate is the strengthening euro. Should the Germans change to please the world? Any attempt at boosting demand by—say—raising wages would be seen in Germany as inflationary.
Geithner’s second point is simpler and stronger: G20 countries should refrain from competitive devaluations or from preventing the appreciation of an undervalued currency. The Treasury Secretary’s comments are squarely directed at China—after all, Germany cannot be accused of cheating the United States with a cheap fixed currency. And as most other successful emerging economies are allowing their currencies to rise, they too are losing out to a China which is building up an export capacity that may eventually struggle to find a market.
The pressure on China is rising. The G20 may or may not make progress on the matter. But if a truce isn’t reached in the intensifying currency wars, protectionism, for now a mere threat, could become a reality.