Currency ‘wars’ dominate G20 summit

The Editor-in-Chief of The Economist magazine says Obama is in a unique position to influence the G20 [AJE]

I always cringe when I read references to ‘war’ in the sports pages. It was a ‘war on the pitch’, a ‘war on the court’.

Now we have ‘a war’ in the financial pages of the newspapers and you can thank Brazil for that. By most accounts, it was recently the Brazilian finance ministry that first coined ‘currency war’ in relation to the monetary face-off between China and the US taking place at the G20 in Seoul. The ‘currency war’ term has stuck.

Now Brazil is going to try to act as unofficial mediator between the two superpowers.

“It’s better to dialogue than to fight,” Lula da Silva, Brazil’s president, implored to world leaders shortly after arriving in South Korea.

But talking can probably go only so far in this conflict, which boils down to this: the US has long claimed that by almost all measures China’s currency is purposefully grossly undervalued.

With an undervalued currency, they argue, China is distorting global financial flows in its favor.

On the flipside, China, and other emerging countries such as Brazil are furious at the US Federal Reserve’s decision to pump $600bn into the American economy last week claiming the move would ‘flood’ developing countries with cheap, speculative dollars and thus weaken local economies.

“Those US dollars end up going abroad like a tsunami and for these developing countries it’s very difficult to contain that pressure,” said Mauricio Cardenas of the Brookings Institute.

“So the dollars are intended to reactivate the economy in the US but end up overseas and that, of course, is a problem for these developing countries where these dollars cause abjection of local currencies.”

‘Less money’

Gustavo Franco, a highly acclaimed Brazilian economist, said that the Fed’s decision will ultimately mean developing countries will have less money they can put away in reserves.

“To the extent the US wants to reduce its balance of payments deficits, it will be like reducing everybody else capacity to accumulate reserves,” Franco said.

“And Brazil and all the other members of the G20 – the periphery countries – liked the accumulation of reserves as that was one of the key reasons why we could defend ourselves from the economic crisis without the crisis becoming a balance of payments nightmare.|

Franco said the economies of China and the United States are two “tectonic forces” because both have such prevailing economic authority on the rest of the world.

“Everyone at the G20 will be trying to mediate China and the US,” Franco said.

“All the other countries in the world would like to see these two giants doing less to make their respective currencies too weak. So this battle has been called a ‘currency war,’ – but it should not be a war, it’s more like an exercise in coordination. We call this macroeconomic coordination and this is the challenge at the G20.

“And it’s interesting that in the recent past such macroeconomic policy was debated at the G7, but now it’s at the G20. So it’s happening in this new context of 20, instead of seven or eight. It’s novel. It’s interesting. Let’s see what comes out of it.”

Brazil as mediator?

While Brazil might try to play mediator, if backed into a corner and forced to choose sides between either Washington or Beijing, likely the Brazilians will side with the Chinese.

Why? Because while Washington was ignoring Brazil the past decade, rightly or wrongly consumed with all things ‘terror’ related, the Chinese were quietly surveying the global landscape and laying the groundwork for a long term friendship with South America’s largest economy right in America’s backyard.

And it’s paid off: It was just last year that China surpassed the United States as Brazil’s largest trading partner, signaling a major shift in the global economic order.

Since then, Brazil has been reluctant to overtly criticise the Chinese. If you were a shop owner would you remind your best customer every time she came in to buy something that they have an ugly hair style?

But that doesn’t excuse Brazilians silence, according to Cardenas.

“I hope in South Korea PresidentLula takes a more balanced approach and mentions a lot the problems of China,” Cardenas said.

“Brazil has been reluctant to start a confrontation with China because everyone knows China is Brazil’s number one client now. But that should be no excuse for saying the right things. And the right things both for the US and China should be to change, and reach an agreement that is beneficial for the rest of the world.”

Guido Mantega, Brazil’s finance minister, said a couple years ago in a meeting in Sao Paulo that, in the past, everyone was invited to global economic meetings.

But, he said, when it came time to making big decisions the ‘industrialised’ countries – like US, Britain, Germany and France – would make those important decisions while representatives from the developing countries were left on the sidelines.

I remember Mantega said something to the effect of, “We don’t want to be left on the sidelines anymore drinking coffee while the big decisions are made.”

Obama’s moment

I recently interviewed John Micklethwait, Editor-in-Chief of The Economist magazine, and I asked his opinion if, from his developed country perspective, the developing power countries were still on the sidelines in vital decisions and if the G20 really has permanently supplanted the G7.

“Brazil is part of the G20 and that is the most obvious answer,” Micklethwait said. “The G20 is a big important organization. And if you think back 2 or 3 years ago, the G20 was really a pipe dream because everything was about the G7 or G8 and the question being asked back then was, ‘Should Russia be part of it?’ But now the world has jumped forward in a unique and impressive way. I think the G20 is a more useful talking shop than we have had before and Brazil is a huge part of that.”

Micklethwait added that he thinks Barack Obama is sitting in a unique moment in history to effect how the G20 pivots.

“My instinct says that over the next 10 years Brazil will get more (international influence),” he said.

“The reason why is that if I was Barack Obama, when people measure me and ask, ‘Was I a good president?’ in, say, 2017 if he gets a second term – and when they ask ‘did he manage to bring the emerging powers into the new world order? If he can’t manage to bring in Brazil, which is basically a very friendly country and a regional superpower, then [Obama] has messed up in a big way.”

That opinion rests on the premise that it’s up to Obama and the US to bring the emerging powers into the new world order. Maybe that is correct.

But perhaps, in places like Sao Paulo, Beijing, New Delhi and Istanbul, it’s viewed just the opposite: Conceivably there it is actually viewed as them – the emerging economic centers of power – who have tied a rope around the ankle of the G7 alliance and are pulling them into a new world economic arrangement.

Maybe the good folks over at the G7 just have not realised it yet.