Increased tensions at G-20, IMF meetings

Published on World Socialist Web Site WSWS, by Nick Beams, April 22, 2013.

Last weekend’s meetings of the International Monetary Fund and the G-20 saw further calls for policies to stimulate global economic growth. There were no concrete measures advanced to implement such a program, however, amid deepening divisions among the major powers … //

… As is the case with the US, the German position is motivated by its national interests. The German government is resisting US demands for greater stimulus because it fears this will mean the commitment of more funds and that further increases in debt could adversely impact on German banks, to the benefit of their US competitors.

Schäuble was joined in his criticisms by Swedish Finance Minister Anders Borg. “The unsustainable fiscal situation in the US and Japan is a source of concern and uncertainty. Credible medium-term fiscal plans should be promptly developed,” he said.

On the other side, Australian Treasurer Wayne Swan lined up behind the US position, condemning the policy of “mindless austerity” being carried out in Europe.

In its semi-annual report on the world economy, the IMF advanced a positive outlook. While pointing to a “bumpy” road ahead and warning of a “three speed recovery”—the US and some economies on the mend, others doing well, and others, principally in Europe, in trouble—the IMF claimed that “global economic prospects have improved again.”

Nobody took much notice, however, because similar hopes have been raised at each of the spring meetings over the past several years, only to see the eruption of a new financial crisis or markedly slower than predicted growth by the end of the year.

The IMF forecast was already being declared outdated as it was delivered, with evidence of a worsening economic position in the US and slower than expected growth in China.

The divergences over so-called fiscal consolidation and debt reduction were also reflected in discussions on quantitative easing—the policy initiated by the US Federal Reserve—in which the major banks undertake purchases in bond markets to increase the supply of money. The policy featured prominently both in the public statements by central bankers and finance ministers and in their private discussions, because of the Bank of Japan’s recent decision to double the country’s money supply over the next two years in a bid to overcome deflation.

The G-20 communiqué sought to paper over the differences. It reiterated its position of last February that countries should seek to move to market-determined rates for their currencies, “refrain from competitive devaluation” and not target exchange rates for competitive purposes.

Whatever the stated public positions, the effect of quantitative easing is to push down the value of the targeted currency. This is seen most clearly in the case of the Japanese yen, which has fallen by more than 20 percent in recent months.

While the Japanese escaped official criticism—Finance Minister Taro Aso was eager to tell reporters that Japan had met with no objections at the meeting—there are growing criticisms.

South Korean Finance Minister Hyun Oh Seok said the falling yen was a “concern” and called for an orderly exit from the loose monetary policy regime.

Chinese central bank head Zhou Xiachuan, warned: “It is necessary to re-evaluate the marginal benefits and costs of such policies after multiple rounds of monetary easing. Prolonged easing could exacerbate the financial vulnerabilities and affect the stability of the international monetary system.”

German Bundesbank head Jens Weidmann, a member of the European Central Bank governing council, said: “It is clear that the longer an ultra-expansionary monetary policy is pursued, the more the risks increase.”

Commenting on the fears about where quantitative easing was heading, IMF managing director Christine Lagarde said: “We certainly heard from the entire membership [of the IMF] that it is unconventional that central bankers … jumped into an unknown landscape.”

One major concern is the effect of a withdrawal of the monetary stimulus on financial markets. Ending the bond-buying program could produce a sharp drop in the value of these financial assets, prompting a rush for the exits and a rise in interest rates that could spark a further financial crisis, this time embroiling the central banks themselves.
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