These imbalances have fueled tensions on the currency markets and prompted angry exchanges about the direction of national policies. Interestingly, this time round it is not the deficit countries, but those with a surplus that are the main target for criticism. China is accused of manipulating its currency to sustain the export surplus. Germany, although not intervening on currency markets, finds itself under fire for its competitive edge and relatively weak internal demand. In retaliation, the surplus countries point out that the ultra-loose fiscal and monetary policies in the United States are thwarting any adjustment of the external account deficits. With interest rates in the US brushing zero and a second round of quantitative easing in the offing, the rest of the world either has to adopt similar policies or risk massive currency appreciation.
G20 Summit: Rebalancing the global economy
Given the mutual interest in avoiding currency and trade wars, the G20 meeting is likely to come up with a solution based on enhanced cooperation. The surplus countries, especially China, are fearful of a more forceful drive by the US to push down the dollar, in its attempt to rebalance the external account. That would inevitably mean more intervention or more appreciation. On the other hand, the US is not keen to see the dollar fall too sharply as this might push up government financing costs and could well jolt strongly appreciating economies back into recession, thereby nullifying any positive effects on the US trade balance. The middle ground could therefore entail:
- continued appreciation of the renminbi at a measured pace, giving room for other Asian currencies also to appreciate slowly vis-à-vis the US dollar (but not against the renminbi);
- less intervention on foreign exchange markets by China and Japan;
- a switch to gradual fiscal consolidation and an exit from QE policies in the United States, ultimately reducing import demand in combination with the lower US dollar;
- and, last but not least, efforts in the surplus countries of Europe to stimulate internal demand.