Goldman's Take On G-20: "The Conclusion Is Countries Have No Alternative To Accepting Appreciation"

For some reason there are those who still believe today's G-20 meeting was relevant. For them, we provide the following summary from Goldman's Thomas Stolper which confirms that this weekend's theater is over, and nothing has changed. "Bottom line: The overall outcome and statement is about what we expected. Slow but steady progress in the right direction, mainly driven by the fact that individual countries come to the conclusion that they have no real alternative to accepting appreciation." Of course, the alternative to this Goldman desired "real alternative" now that the play is over and real life can resume, is currency and trade war. Which is precisely what is on the docket next.

1. The outcome of the G20 meeting clearly shows progress in the global rebalancing policy debate. In particular the FX relevant sections have become a lot more prominent and all the key issues have found some mention, including current account positions, protectionism, capital controls and exchange rate flexibility.

2. At the same time, this is not a Plaza-style statement that signals a broad agreement on the role currencies have to play in the global rebalancing. Just taking the first sentence of the FX bullet (copied below), the language is not tight enough to impose anything on anybody. The Chinese Authorities surely think they already are "moving" towards "more market determined exchange rates" and they probably also think that the US should "refrain from competitive devaluation".

3. Nothing specific is said about Asian surplus countries, including China, to allow more trade weighted appreciation. That is the kind of language the G7 used to use when getting impatient (see for example the October 2007 Washington statement). Even a commitment to refrain from policies that prevent appreciation in surplus countries would have been a much bigger deal than the actual statement. Instead the statement explicitly puts the following item on the agenda for the Seoul G20 summit, which suggests a wide range of opinions on capital controls still: “Further work on macro-prudential policy frameworks, including tools to help mitigate the impact of excessive capital flows.”

4. We continue to think the speed of progress depends largely on how quickly key NJA countries realise that there are no other sustainable solutions to their problems - excessive reserve accumulation in particular - than FX appreciation. The G20 meeting was surely helpful in this broader process and there is plenty of good-will, but it was not a great leap either.

5. Bottom line: The overall outcome and statement is about what we expected. Slow but steady progress in the right direction, mainly driven by the fact that individual countries come to the conclusion that they have no real alternative to accepting appreciation.


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G-20 Communique, Seoul October 21, 2010, Section 3, Bullet 5
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Specifically we will [...] move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries. Together, we will reinvigorate our efforts to promote a stable and well-functioning international monetary system and call on the IMF to deepen its work in these areas. We welcome the IMF’s work to conduct spillover assessments of the wider impact of systemic economies’ policies.