For those that are expecting a dramatic outcome from the current G20 finance and a later heads of state follow up meeting in November, there is no "Plaza type" accord on the dollar from these meetings. The Plaza Accord was an agreement between the governments of France, West German, Japan, the United States, and the United Kingdom, to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets. The five governments signed the accord on Sept. 22, 1985 at the Plaza Hotel in New York. The current G20 deadlock has some eerie reminiscences of the problems afflicting the US dollar.
The exchange rate value of the dollar versus the yen had declined by 51 percent from 1985 to 1987. Most of this devaluation was due to the $10 billion spent by the participating central banks. Currency speculation caused the dollar to continue its fall after the end of coordinated interventions. Unlike some similar financial crises, such as the Mexican and the Argentine financial crises of 1994 and 2001 respectively, this devaluation was planned, done in an orderly, pre-announced manner and did not lead to financial panic in the world markets. Today the markets are neither orderly nor planned, and the whiff of financial panic and crisis is still lingering.
This G20 meeting is about putting together a more transparent rebalancing framework and moving it forward, at least until the next financial crisis - with implications for the relationship between the dollar, China/Asia, and all those caught in the middle such as Saudi Arabia and other dollar surplus countries.
The problem for the G20 finance ministers is to find an acceptable implementation of that rebalancing ideal, to which everyone theoretically agrees to without losing face, but the way it has been announced has caused a stir. Secretary Geithner's proposal of a global current account target of +/- 4 percent of GDP has been immediately criticized by various (export oriented) countries, and will never be agreed to by surplus countries. The first feel that they will be disadvantaged and it will slow down their growth, while the second feel that they are being penalized for accumulating depreciating dollar reserves. What the USA wanted however, was to get the negotiating ball rolling. For this Geithner has to be thanked, as the US has for the first time thrown out a target that even with little expectations of immediate adoption opens the door to a concrete global policymaker debate on what actually constitutes an FX imbalance and what doesn't. Until now, political threats, especially against China, seemed to be the bench-marking of currency diplomacy.
Many countries will initially resist even engaging in this debate, and certainly refuse to submit to an arbitrary global or supranational constraint on their domestic economic policy. But the discussion of what is "acceptable" and what is not has now been concretely pushed forward and it is up to other nations to propose different bands for discussion, including that global financial arbitrator, the International Monetary Fund.
The American proposals push the IMF toward a conceptual policy roadmap to put some cloth around the overvalued/undervalued topic, adding more precision to currency manipulation charges and countercharges. Countries may not adhere to what the IMF says, but that will not stop the IMF from doing its duty, even if what they say or recommend remains not binding.
All eyes however have been on the reaction and counter reaction of the two main protagonists - the USA and China. While the USA is taking an aggressive stand and there will be no agreement to such far reaching currency commitments, the tone of the G20 meeting is of finding common ground and conciliation between the various parties, and not one of escalating conflict. China will continue to be in the spotlight and of course resist pressure. While progress on the yuan appreciation has been slow, and certainly too slow for Congress, pressure on China will continue to be there. There will not be a one off revaluation of the Chinese currency after the meetings, but the appreciation will be allowed to proceed at a snails pace. And while the US administration may not be completely happy with that pace, and prefer something closer to 10 percent in a shorter time frame, they will have to learn to live with it, as the alternative is currency gridlock.
On the political front, after some doubts on whether the Chinese president will be visiting the USA in early 2011, Chinese officials announced that President Hu would in fact be meeting President Obama in January. China understands the value of symbolic gestures. China does not want to "give" on the yuan too directly on the back of G20 pressure, but at the same time the US market is too important to their own economic growth to avoid ignoring grassroot US Congressional pressure on the administration. Until the January visit materializes, a couple of months will give President Hu the time he needs to show some progress to the US and to global counterparts. Patience will have paid off to those who are prepared to wait.
(Mohamed A. Ramady is a former banker and currently visiting associate professor at King Fahd University of Petroleum and Minerals, Dhahran.)
