Last week economists from around the world met in Istanbul at the annual summit of the International Monetary Fund (IMF). The main topic of discussion was whether the restructuring of the world economy would lead to a weaker US dollar and a stronger euro. The euro has gained about 16 per cent versus the US currency since March.
Currencies of emerging market nations should bear much of the brunt of any realignment, Trichet said in an interview broadcast on Turkish TV. “It is absolutely clear that a number of currencies have to progressively and orderly appreciate vis-à-vis both the dollar and the euro.”
Trichet did not name the emerging market nations, but developed countries urged China once more at the weekend to let its yuan appreciate. Beijing has been criticised for not letting the yuan rise since summer 2008 when the global financial crisis began. China, which has a massive trade surplus, showed no sign of complying.
If the Chinese currency realigned itself along its actual value, the United States and other developed countries could cut their trade deficit by increasing the cost of Chinese goods and favour domestic products. According to the Peterson Institute, the renminbi is 40 per cent cheaper than it fundamentally should be.
Although all parties agree to the need for reform in international economic institutions and for greater checks and balances in the world economy, developed and emerging nations are at odds over the burden each side should shoulder to overcome the global crisis.
China’s economy is still export-driven and Chinese leaders expect to increase production and cut unemployment by jumpstarting exports. For Beijing, high levels of unemployment are unacceptable because it might lead to further social unrest. The country has no proper social safety net and large segments of the population are still poor. For this reason, a strong yuan could badly affect exports, as Bank of China Vice-President Yi Hang said in Istanbul.
Beijing in fact is not willing to make any concessions without adequate compensation, above all in terms of its representation in international financial institutions and the place of the yuan among world currencies. In this, it is backed by other emerging nations like India and Brazil.
However, any shift in policy would take time to produce results because it would require that Beijing change its development strategy to make the country’s economy less dependent on exports. Western nations want instead quick changes to meet the needs of their own industries and labour markets.
The debate now moves to the next G20 summit, the venue chosen by world leaders in lieu of the G7 to discuss economic policy because of the growing importance of China and other emerging economies.