When President Obama arrived in Seoul for the G20 Summit earlier this week, the Federal Reserve’s recently announced round of quantitative easing (see here, here & here for better explanations than we’re capable of) had increased the chattering about the possibility of a global currency war.
The Council on Foreign Relations Sebastian Mallaby wrote last week, “quantitative easing will test the world’s commitment to an open international economy… the United States has lost its moral authority to broker currency peace.”
William R. Cline and John Williamson in a recent policy brief for the Peterson Institute for International Economics wrote that “a widespread currency war is in prospect.”
Many countries, including Brazil, China, India, Indonesia, Israel, Japan, Korea, Malaysia, the Philippines, Singapore, South Africa, Switzerland, Taiwan, and Thailand, are reported recently to have engaged in exchange market intervention and/or capital controls to curb currency appreciation. There are fears that currency appreciation may be worsened by the additional quantitative easing (the so-called QE2) in the United States.
Prior to arriving in South Korea, President Obama defended the Fed in a press conference from India. “I will say that the Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole.” He added, “the bottom line is that every country that participates in the G20 will benefit if the United States’ economy is growing.”
Needless to say, not everyone is as rosy on the Fed’s actions. In the Financial Times, the Brazilian Finance Minister Guido Mantega said, “Everybody wants the U.S. economy to recover, but it does no good at all to just throw dollars from a helicopter.”
Well, two days later the G20 Summit has come to an end and according to South Korean President Lee Myung-bak the world has gotten at least a temporary reprieve on an all out currency warfare. Following the Summit Lee said, “For now, in conclusion, (the world) is out of the so-called currency war.”
Technically, the declaration stated the twenty leading economies commitment to:
Undertake macroeconomic policies, including fiscal consolidation where necessary, to ensure ongoing recovery and sustainable growth and enhance the stability of financial markets, in particular moving toward more market determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals, and refraining from competitive devaluation of currencies.
The final communiqué did not include any hard limits, but rather consensus on “refraining” from messing with exchange rates. The G20 has put off the hard decisions until next year.
But to President Obama, any agreement – even a weakened agreement – is occasion to celebrate. “Instead of hitting home runs, sometimes we’re going to hit singles.”