WASHINGTON/BRUSSELS, Oct 20 (Reuters) - The world's biggest economies are slipping back into pre-crisis bad habits, U.S. and European officials warned on Wednesday, and the G20 should target trade gaps and exchange rates to balance global growth.
A draft European Union document, prepared for a Group of 20 finance leaders meeting in Korea on Friday and Saturday, showed EU concern that global trade and savings imbalances are widening again after a brief, recession-induced lull.
"(This) could pose significant problems to the global economy and raise the risk of protectionist backlashes," the document, obtained by Reuters, said.
Long before the financial crisis blew up in 2007, economists fretted over huge trade gaps, particularly between export-rich China and the borrow-and-spend United States. Those concerns have intensified again as the recovery loses vigor.
The EU paper singled out China, which has amassed $2.6 trillion in reserves as its exports bounced back, as a primary culprit behind the growing global imbalances.
Europe and the United States want Beijing to allow its yuan currency to rise more rapidly to help cap its export growth and reduce its reserves. Officials in both regions have stepped up their rhetoric as the G20 meeting approaches.
Since China dropped its formal peg to the U.S. dollar in June, the yuan has strengthened modestly against the dollar but has weakened against the euro.
Currency exchange rates have become a major source of friction in recent weeks as the dollar weakens. Because China keeps the yuan closely aligned with the dollar, other currencies have borne the brunt of the adjustment. The euro, yen and many emerging market currencies have strengthened.
The United States wants G20 countries to commit to letting their currencies move more freely and to curb trade deficits or surpluses. [ID:nN20214175]
A U.S. Treasury official, who spoke on condition of anonymity, said that when large economies keep their currencies from rising, "that compels other countries to do the same, setting off a dynamic of competitive nonappreciation."
That comment was clearly directed at Beijing although the official did not mention China by name.
China has argued that U.S. policies are the root of strained currency relationships. A weak U.S. economy, near-zero interest rates and expectations the Federal Reserve will soon launch another round of monetary easing have driven the dollar down 13 percent against a basket of currencies <.DXY> since June.
A combination of slow growth and high government debt in most advanced economies means the Fed and other central banks are the main source of economic support for a sluggish recovery.
Britain plans to cut 500,000 jobs, raise the retirement age and slash welfare as part of a cost-cutting drive announced on Wednesday. In France, protests have raged over pension reform.
TARGETING TRADE?
The currency debate has flared on and off for years with little progress. One way to break the deadlock may be to consider a target for current accounts — a broad measure of trade — rather than just focusing on exchange rates.
Asked if China might be more willing to discuss a target for its current account — a broad measure of trade — rather than exchange rates, the U.S. official first suggested asking China but then stated the U.S. position.
"From our perspective we believe these issues are fundamentally, inherently linked," the official said.
The idea would be to agree to a pre-set limit on the size a country’s current account surplus or deficit could reach, expressed in terms of a percentage of national output.
The problem would be that some countries with high deficits or surpluses might be unwilling or unable to quickly reduce them to an agreed level.
The Bank of Canada expressed optimism that G20 nations would eventually make progress in talks to defuse global currency tensions and it also had conciliatory words for China. [ID:nN20214175]
Bank of Canada Governor Mark Carney said it may not look like G20 officials were making headway on currency concerns but insisted they were "getting down into the real policy decisions."
"I think we just have to be more relentless on this, constructive in the room, and we will ultimately … make progress," he said.
Carney said he understood why Beijing prefers to let the yuan rise gradually. China fears that an abrupt yuan rise would put such a burden on exporters that they would be forced to cut jobs, which could be destabilizing at home and abroad.
"But as part of rebalancing the global economy, increased flexibility of the (yuan) is absolutely essential and we’re working with our partners to ensure — including China — that that is the case."
