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Sunday, October 31, 2010

G20 summit must reject competitive devaluations-EU leaders - Yahoo! Singapore News

BRUSSELS, Oct 29 - European Union leaders will tell G20 counterparts next month to reject competitive currency devaluations, as agreed by finance ministers, but are unlikely to accept U.S. numerical goals for current account balances.

Leaders of the world's 20 biggest developing and developed economies meet on Nov. 11-12 in Seoul to seek ways to rebalance world economic growth as diverging global trade and savings trends re-emerge after the economic downturn.

"The recovery of the world economy will be at stake and global economic imbalances and exchange rates will be at stake," European Council President Herman van Rompuy, who chaired the EU summit told a news conference.

"These issues affect the prospect for growth and employment in the European Union," he said.

The trade imbalances have triggered direct and indirect government interventions in foreign exchange markets to weaken their own currencies, or stop them from strengthening, in what Brazil has called "currency wars".

" stresses the need to avoid all forms of protectionism and to avoid engaging in exchange rate moves aimed at gaining short term competitive advantages," EU leaders said in written conclusions for the Seoul summit.

G20 finance ministers agreed last week to avoid competitive devaluations but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects.

The United States and the European Union believe that one of the key problems behind the huge trade and savings imbalances is the artificially weak Chinese yuan currency, which gives exports from China a competitive advantage.

In a bid to spur a faster revaluation of the yuan, the rate of which is managed by Beijing, Washington proposed to limit current account imbalances to 4 percent of GDP, as China had a current account surplus of 5.8 percent in 2009.

While there was no deal on the U.S. proposal, G20 ministers agreed that indicative targets should be rolled out at the G20 summit. South Korea's finance minister said on Thursday that G20 leaders would continue to discuss current account targets.

While the EU seems as keen as the United States to see the yuan strengthen, it is unlikely to back current account targets because its biggest economy Germany, which some EU diplomats call Europe's China because of its reliance on exports, had a 4.9 percent of GDP current account surplus last year.

The United States, by contrast, runs a substantial trade deficit, largely due to its deficit with China.

"If the debate on setting current accounts target will came back at the table, we should underline the benefits of our own mechanism based on a limited number of indicators," Van Rompuy and European Commission President Jose Manuel Barroso said in a joint letter on the Seoul summit endorsed by EU leaders.

An earlier version of the letter was even more explicit:

"We have presented a proposal to the G20 on how to address these issues in a cooperative way... without having to resort to controversial quantitative targets, as suggested by the U.S."

Van Rompuy and Barroso, who will represent the 27-nation EU in Seoul, will call for remedial action on exchange rates and capital flows to stop a widening of global imbalances, according to the first version of the letter.

Following a proposal from European Central Bank President Jean-Claude Trichet, the letter from the two EU leaders was changed to include more clear language on what the EU expects in terms of exchange rate policies.

"We cannot ignore the recent exchange rate issues and should promote our shared interest in a strong and stable international financial system," the final version of the letter said.

"The G20 should reaffirm its commitment to move towards more market oriented exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies," it said.

By Jan Strupczewski Yahoo News October 29, 2010


G20 summit must reject competitive devaluations-EU leaders - Yahoo! Singapore News

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