U.S. Treasury Secretary Timothy Geithner.KEVIN LAMARQUE
The G20 is pledging market forces will be the main driver of exchange rates - rather than deliberate state measures to drive down currencies - as a marathon round of bargaining concluded with a watered-down version of a Washington proposal.
In an attempt to sidestep a direct feud with China over currencies, U.S. Treasury Secretary Tim Geithner arrived in South Korea for a meeting with a written plan urging G20 finance ministers and central bankers to tackle current account balances - a broader measure of foreign trade that is connected to currencies and exchange rates.
After two days of closed door negotiations, their final communiqué pledges to "move towards more market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies."
The G20 also pledges to reduce "excessive imbalances" and to maintain current account levels at sustainable levels. However the guidelines as to what is excessive and what is sustainable remain "to be agreed."
Canada's finance minister Jim Flaherty simply said "we'll see" when asked to explain that line.
"It requires further discussion. We have three weeks between now and when the leaders meet. We can see what can be accomplished over that period of time," he said during a news conference with reporters. "I do think we moved the ball down the field this weekend."
While the U.S. is focusing the G20's attention on China, other members say Washington is to blame for some of the currency tension. German Economy minister Rainer Bruederle was quoted by Reuters criticizing the U.S. policy of injecting the economy with cash through a practice called quantitative easing.
"I tried to make clear in my contribution to the discussion that I regard that (easing) as the wrong way to go," said Mr. Bruederle.
"An excessive, permanent increase in money (supply) is, in my view, an indirect manipulation of the (foreign exchange) rate."
The meeting lays the groundwork for the next G20 leaders' summit, which begins Nov. 11 in Seoul. G20 members, who together represent 85 per cent of the world economy, are trying to manage a lopsided global recovery.
The communiqué also announced a shift in voting power at the International Monetary Fund away from traditional world powers toward emerging economies.
IMF Managing Director Dominique Strauss-Kahn called the move the "biggest reform ever in the governance of the institution."
As part of the deal, Europe gives up two seats on the IMF's executive board. As well, more than six per cent of voting shares shift from traditional powers to emerging market and developing countries.
The G20 talks come as established economies in Europe and the United States continue to struggle in spite of stimulus spending and rock-bottom interest rates. Meanwhile, their loose money policies are flooding already hot emerging markets, fueling concern about inflation, asset bubbles and currency fluctuations.
The focus on capital accounts -- a broad measure of trade in goods and services with other nations -- is meant to encourage large surplus countries such as China to either allow its currency to rise or take other measures that encourage more domestic consumption and imports.
South Korea's president Lee Myung-bak, who supported the focus on capital accounts, raised the stakes with his opening speech Friday.
He warned the G20 would "inflict damage on the world economy" if it failed to reach consensus.
"If you don't produce a result in Gyeongju, I may ground all the planes and buses out of Gyeongju," he said.
The final agreement does not contain specific targets. While targets were not mentioned in Mr. Geithner's letter, other countries said the U.S. had suggested in the meetings that current account surpluses and deficits by capped at four per cent of national output.
That plan drew immediate resistance from countries that are outside that range. While China currently runs surpluses above that proposed target, so does Germany, Russia and Saudi Arabia. Turkey and South Africa have deficits that are larger than four per cent.
The final language in the Gyeongju communiqué is similar to what was agreed to by G20 leaders in June in Toronto. Then, the final statement pledged that "advanced deficit countries" should take actions to boost national savings, maintain open markets and enhance export competitiveness.
It also stated that surplus economies will undertake reforms to reduce their reliance on external demand and focus more on domestic sources of growth.
The statement in Gyeongju appears to go further however, in asking the IMF to play a role in assessing how well G20 nations meet their pledges.