The G20 sealed an accord branded as "historic" on Saturday (24 October) to reform the International Monetary Fund, in a grand bargain that will see Europe give up two seats on the Fund's Executive Board in return for greater responsibility from emerging economies on currency valuations.
At a meeting in Gyeongju, South Korea, G20 finance ministers recognised the quickening shift in economic power away from Western industrial nations by striking a surprise deal to give emerging nations a bigger voice in the International Monetary Fund.
Under the agreement, more than 6% of the IMF's quotas – membership subscriptions that help determine voting power – will be shifted to emerging economies whose clout in the Fund has not kept pace with their economic ascent.
China will overtake traditional powerhouses Germany, France and Britain to become the third most powerful member of the IMF, up from sixth spot now.
India, Russia and Brazil will also wield more power in the fund, with greater voting powers as well as financial obligations and access to IMF funds.
Europe will give up two seats on the fund's 24-strong Executive Board.
The United States had sought a greater reduction in Europe's influence on the board, but agreed to the compromise in return for retaining its veto power over the Fund's most important decisions.
IMF Managing Director Dominique Strauss-Kahn called the agreement historic. "This makes for the biggest reform ever in the governance of the institution," he said.
"Our complaint was that the quota share should reflect ground reality and economic strengths currently," Indian Finance Minister Pranab Mukherjee said. "Otherwise, it would have eroded the credibility of the institution. That has now been corrected."
Germany slams US monetary policy
The main aim of the two days of talks, which precede a G20 summit in Seoul on 11-12 November, was to ease currency strains that some economists feared could escalate into trade wars.
The gathering saw the United States come under fire from Germany and China for the super-loose monetary policy stance it has adopted in an attempt to breathe life into the sluggish US economy.
German Economy Minister Rainer Bruederle said he had made clear that easing was the wrong way to go. "An excessive, permanent increase in money is, in my view, an indirect manipulation of the [foreign exchange] rate," he said.
But Bruederle added he was positively surprised by the results of the meeting, which he said surpassed expectations.
Developing countries clash with US
Developing countries are worried that Washington, by flooding the US banking system with cash, is pumping up asset prices and exchange rates, thus undermining the competitiveness of the export industries on which they rely for growth.
China, among others, frets that the US policy stance will debase the dollar, the lynchpin of the global economy.
In a thinly veiled reference to the United States, the G20 statement said advanced countries, including those with reserve currencies, would be vigilant against excessive volatility and disorderly movements in exchange rates.
Washington, by contrast, is frustrated over the refusal of China in particular to let its currency rise to a level that reflects its growing economic power and would help reduce its big trade surplus with the United States.
"If the world is going to be able to grow at a strong, sustainable pace in the future […] then we need to work to achieve more balance in the pattern of global growth as we recover from the crisis," US Treasury Secretary Timothy Geithner said.
Soothing final communiqué
US demands resulted in a call, inserted in the summit's final communiqué, for more market-determined exchange rate systems, words that were directed primarily at China's undervalued currency.
US officials were also pleased that the communiqué committed G20 members to "refrain from competitive devaluations" of their currencies and to pursue a full range of policies to reduce excessive external imbalances.
For emerging nations, there was a promise in the closing statement that countries issuing reserve currencies – code principally for the United States – would be vigilant against excessive volatility and disorderly movements in exchange rates.
Chris Turner, head of FX strategy at ING Commercial Banking in London, argued that the G20 surpassed market expectations by delivering a comprehensive set of reforms: Washington had pledged not to devalue the dollar in return for an agreement by emerging market (EM) economies to let their currencies appreciate.
From this point of view, the surprise agreement to transfer 6% of voting power at the IMF to developing countries should be seen as part of a grand bargain. "The US now argues that with greater representation comes greater responsibility. Thus EM nations should allow their currencies to trade more freely," Turner said in a note.
"To my mind, today's achievements show that G20 can deliver," said Olli Rehn, the European Union's economic and monetary affairs commissioner.
However, for sceptics, the excitement about currency wars has given way to an uneasy truce, in what could yet break out into outright hostilities.
Geithner will keep up the pressure on Sunday for a stronger yuan when he holds talks in Qingdao, China with Vice-Premier Wang Qishan, who has broad responsibility for economic policy.
"The content of the G20 statement is generic and broadly in line with expectations, but this should not detract from the fact important progress was made in giving emerging market countries a greater voice in the IMF," said Claudio Piron, a currency strategist at Bank of America Merrill Lynch in Singapore.
(EURACTIV with Reuters.)