As the G20 summit opens in Seoul today (10 November), the European Union has called on major economies to refrain from competitive devaluations amid warnings from Berlin about the weak US and Chinese currencies and fears of rising protectionism.
Ahead of the two-day meeting, European Commission President José Manuel Barroso called on the G20 to "give a clear political commitment to cooperative and lasting solutions to the current tensions in currency markets".
In a letter co-signed with EU Council President Herman Van Rompuy, Barroso urged the G20 "to allow exchange rates to be set in line with market fundamentals and to refrain from competitive devaluation of currencies".
Because the economic recovery is still fragile, several countries may be interested in weakening their currency, EU officials explained before departing for Seoul.
EU countries last week slammed plans by the US Federal Reserve to inject $600bn into the American economy by massively buying back government bonds in 2011. The euro rose against the dollar on the news, leading to a wave of criticism by France and Germany.
'Quantitative easing = Protectionism'
However, EU officials believe the strategy will not work. "In the US, because interest rates are already low and the banks are not willing to lend, we do not think that quantitative easing will have a significant impact," the official said.
"Quantitative easing can be a form of protectionism," the official added. "I think the world will listen to what [US] President [Barack] Obama has to say about it."
But the EU's concerns about weak currencies do not stop at the US. In an interview with the Financial Times on Tuesday (9 November), German Chancellor Angela Merkel, said: "Exchange rates should reflect the real economic strength of a country […] Particularly in view of the debate about China, we need to find facts and benchmarks to calculate what is a fair exchange rate."
China's trade surplus grew to 27.15 billion dollars in October, according to customs authority figures, adding to pressure on Beijing to let its currency appreciate ahead of the G20.
The United States has long accused China of keeping the yuan artificially weak to benefit its exporters. But Chinese officials now say the Fed is weakening the dollar with a second round of quantitative easing, which is equal to printing money.
"The debate on exchange rate developments and the threat of 'currency war' is a clear warning," said BusinessEurope, the EU employers' organisation. Failure to develop a multilateral approach on the issue will carry "great risks of renewed protectionism," warned the group in an unusually strong statement.
From crisis response to longer-term global economic coordination
Barroso concurred with Merkel, saying "G20 members should consider the possible effects on their partners and the global economy and refrain from actions that may have negative spillovers".
Speaking to journalists ahead of the meeting, he said the Seoul summit will be "a credibility test" for the G20 as the world economies move from the immediate response to the global financial crisis to "medium-term objectives" and "longer-term global economic coordination".
EU officials said they expected the US and China to resist calls for greater surveillance of their economic and monetary policies because it is "an issue of sovereignty".
"I really don't know if they are now ready to move a step further," the official added, "but if they could accept some kind of benchmarking, soft surveillance, I think it would be good progress".
"The coordination of economic policies in general – that will be the key test," the official said, adding this should include the acceptance of "peer pressure" and "recommendations" from others.
EU resists US calls on current account imbalances
However, the EU itself appears unwilling to accept too much peer pressure. In her FT interview, Chancellor Merkel rejected US calls to quantify the level at which a country's trade surplus can be considered as a risk for the global economy.
Despite public calls for greater economic surveillance at global level, EU officials yesterday backed Merkel's claims. "On the current account imbalances, we should reject a quantitative target. I think it is too mechanic, one-size-fits-all, and that is not the right approach," the EU official said.
"We are in favour of a broader set of indicators."
In fact, Berlin "is concerned about the US-led debate on global imbalances [because] it shoves Germany into the same corner as China, ignoring the fact that Germany cannot manipulate its currency, the euro," wrote Eurointelligence, an Internet-based service for economic commentary and analysis of the euro area.