France Pushing G20 Deal to Address Global Imbalances

by: Howard Richman

According to a Reuters article published February 17, the G-20 will meet this weekend to discuss measures that can be used to determine whether there are global trade imbalances. French President Sarkozy is pushing the agenda. Here's a selection:

G20 countries will have made major progress this weekend if they clinch a preliminary accord on what measures they will use to benchmark and address mismatches in the world economy, France's economy minister said on Thursday....

Her remarks came amid concern that differences of opinion within the Group of 20 may prevent finance ministers from reaching agreement at the meeting on a five-item list of indicators on which to base judgments on whether countries should alter economic policy to redress imbalances....

Such an agreement would let Europe and North America recover from the Great Recession by selling increased exports to the emerging market countries without getting the same amount of additional imports from the emerging market countries. Currently, the emerging market governments are preventing worldwide trade balances by buying oodles of foreign reserves. Figure 8 from Federal Reserve Chairman Ben Bernanke’s November 19, 2010, speech in Frankfurt, Germany, shows that 13 of 16 emerging market governments devoted more than 3% of their countries’ GDP to currency market interventions from September 2009 to September 2010. In order to buy foreign reserves without causing much inflation, they have been suppressing their own people's access to credit.

I can't see why China's ministers would agree to any such agreement unless they are getting something big in return. Perhaps Sarkozy is offering that the IMF guarantee China's more than $2 trillion of reserves (mostly dollars) with IMF special drawing rights (SDRs). That way the dollar can collapse without China suffering much loss in the value of its savings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.