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As Obama arrives in Seoul, Fed decision clouds G-20 debate

The Group of 20 meets to discuss a strategy for stabilizing and bolstering the global economy.

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"We were not able to come up with the specifics," South Korean President Lee Myung-bak, the meeting's host, said in an interview. "That will be left to a working group. It will take some time."

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Discussions among the leaders are scheduled for Thursday and Friday, with preliminary G-20 sessions to begin Wednesday.

The Obama administration proposal, endorsed by G-20 finance ministers last month, calls for the International Monetary Fund to evaluate how each nation's policies help or hurt others. Even if the details of this program were agreed upon by world leaders, it remains unclear how nations could be forced to revise their policies if they run afoul of the IMF because there is no enforcement mechanism.

"The critical question is when the G-20 will move beyond platitudes . . . and on to something concrete, something that might prompt some member of the G-20 to deviate" from the decisions it would otherwise make, said Phil Levy, an analyst at the American Enterprise Institute.

The world leaders also face a challenge in determining what exactly balanced trade would look like.

While China's currency exchange rate has been a focus of discussion, various G-20 countries see the issue their own way. From a U.S. perspective, the matter is clear-cut: China intervenes steadily in currency markets to hold down the value of its yuan and keep its exports competitive, adding to the mammoth U.S. trade deficit with the country.

But seven G-20 nations have trade surpluses with China - countries such as South Korea that sell half-finished manufactured goods for assembly in China, and exporters of raw materials such as Australia and Saudi Arabia that supply China's oil, minerals and other commodities. Those nations agree on the need for more balanced global trade but also benefit from China's export power.

There's also a confluence of interests between Germany and China. They both have economies that generate large trade surpluses and hope to keep it that way.

After the onset of the global economic crisis major nations agreed to open their checkbooks and jointly stimulate the world economy. As concerns about debt have mounted, however, some countries have resisted additional measures to energize the recovery.

President Obama has pressed for more cooperation to put the world economy on sounder footing. And the IMF has produced research saying that coordinated economic policy could add trillions of dollars to global economic output. Meanwhile, the world is stepping up cooperation on financial regulation with the expected endorsement by G-20 leaders this week of new banking rules proposed this year by an international panel of central bankers meeting in Switzerland.

But the dispute over the Fed's action last week highlights the unresolved tension between U.S. domestic priorities and the push for greater international cooperation. The announcement came, for example, shortly after U.S. Treasury Secretary Timothy F. Geithner pledged, along with other G-20 finance chiefs at a meeting in South Korea last month, that countries would avoid moves that would unsettle other countries' currency values and capital markets.

Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation. Other foreign critics said the action contradicted U.S. promises to adopt greater economic discipline and be mindful, as the manager of the world's premier currency, of how domestic policy decisions affect other countries.

"We hope there won't be any backsliding," Indonesian Trade Minister Mari Pangestu said in an interview. "The approach should not be unilateral or bilateral. You need to address underlying structural imbalances." She said these include large levels of debt owned by the U.S. government and other developed countries.

Despite the public criticism, South Korean Strategy and Finance Minister Jeun-Hyung Yoon said that the Fed's move was not unexpected and the amount of money involved is not necessarily disruptive. Federal Reserve Chairman Ben S. Bernanke had previously briefed the G-20 finance ministers on the Fed's general approach so the massive bond purchases would not take them by surprise, and the group understood the importance of keeping U.S. growth on track, Yoon said.

"If you look at conditions in the U.S., it is a difficult situation," he said. Yoon cited the tepid U.S. recovery and weak labor market as considerations that could offset concerns about the impact of the Fed action beyond U.S. borders.

Branigin reported from Washington.


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