China’s Currency Off the Table, G-20 Focuses on Europe

China’s decision to allow its currency to rise gradually against the dollar has strengthened the Obama administration’s hand going into a summit meeting of the Group of 20 countries this weekend in Toronto. But other challenges, from Europe’s debt crisis to changes in banking regulation, could test the unity of the G-20 as it moves from crisis control to a more complicated agenda of economic coordination.

A senior administration official said on Monday that China’s announcement had significantly changed the dynamics for the G-20 meeting, removing for now what had been the dominant item on the agenda. Other G-20 members, from the European Union to Brazil and India, had called for China to agree to exchange-rate flexibility, and other finance ministers had repeatedly pressed the Treasury secretary, Timothy F. Geithner, on the matter, officials said.

While the foreign exchange issue was not conclusively settled — Mr. Geithner reiterated his statement over the weekend that the test would be in how far China moved, and how fast — the Chinese announcement allows the administration to focus on Europe, where growth is lagging far behind East Asia and North America.
 
Officials said on Monday that the pace and path of European fiscal consolidation was likely to be the main topic of discussion, along with three critical questions relating to regulatory reform: how tough to make new capital requirements for banks, how best to oversee the trading of derivatives, and whether to impose a tax on giant banks, which is favored by the United States and most European economies. Canada, Japan and Australia oppose the bank tax.

The administration official said the United States, while satisfied with Europe’s decision to conduct bank stress tests, would press it to continue its political and financial pledge to solving its debt and fiscal problems.

The official said that Mr. Obama’s letter to G-20 leaders last week, in which he urged countries not to move too quickly to pare their budgets, was intended as a cautionary message and said that the United States and the European Union were in substantial agreement on the need to cut deficits in the medium term.

But political experts on both sides of the Atlantic say that the American approach of pumping money into the economy is also not certain to work.

“Everybody wants a self-sustaining recovery in private-sector demand, but how?” said Daniel Gros, director of the Center for European Policy Studies, a research organization based in Brussels. “By keeping deficits high (the U.S. approach) or by starting the exit now to strengthen private-sector confidence (the E.U. approach)? Who knows what will work better?”

Another area of tension threatens to overshadow what was supposed to be a signature legislative accomplishment: passage of a sweeping overhaul of the Depression-era financial architecture. Congressional negotiators are trying to wrap up work this week on a merger of the House and Senate versions of a major overhaul of financial regulations.

The United States needs agreement from other wealthy nations on new liquidity requirements and higher capital standards for giant banks and new restrictions on the trading of derivatives. But while the desirability of those new rules was not in question, Mr. Geithner left a meeting of G-20 finance ministers in Busan, South Korea, early this month without agreement on their scope and timing. The Basel Committee on Banking Supervision, a global regulatory body, on Friday postponed to December 2011 its deadline for completing new capital standards, a reflection of the lack of consensus in Busan.

“New rules to enhance both the quantity and quality of capital held by financial institutions are widely acknowledged as essential elements of global financial reform efforts,” said Daniel M. Price, who was President George W. Bush’s personal representative to a G-20 leaders’ meeting, in November 2008. “Yet there is disagreement among financial institutions and among regulators on what counts as capital, how capital should be computed and what the macroeconomic impact of these new rules will be.”

As the crisis gave way to a painful recession, Mr. Obama used the G-20 meetings last year in London and Pittsburgh to obtain consensus on stimulus spending, stabilizing banking systems, providing more financing for the International Monetary Fund and respecting trade agreements.

But analysts now caution that it would be unrealistic to expect the G-20, given its members’ disparate interests, to be a global economic steering committee.

“The G-20 has not delivered that much in terms of financial regulation, and neither has it delivered that much in terms of macroeconomic coordination,” said Nicolas Véron, a senior fellow at Bruegel, a policy research organization based in Brussels. “There is very little the G-20 can do about the crisis in Europe. It’s for the Europeans to sort out, and the I.M.F. has to play its role.”

Others say that the G-20 has represented a remarkable advance for global dialogue in a short time.

“There were real questions about the viability of the organization” when the G-20 leaders first met in Washington, said Madeleine K. Albright, the former secretary of state, who was an emissary, along with Jim Leach, a former congressman, for Mr. Obama at that meeting.

Last year’s summit meetings in London and Pittsburgh were “a big step forward in creating a sense of common purpose,” Dr. Albright said.

The G-20 was created in 1999, in the aftermath of the 1997 Asian financial crisis. It was mostly a gathering of finance ministers and central bank governors until Mr. Bush elevated its status.

The previous dominant economic forum for world leaders, the G-8, was similarly born out of a crisis: the 1973 oil shock and the subsequent worldwide recession. (Leaders of the G-8 countries will meet in Ontario, on Friday and Saturday, before the start of the G-20 meeting in Toronto.)

Though the worst of the latest crisis has passed, Mr. Obama argued in his letter that the need for concerted action remained.

“In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avoid a slowdown in economic activity,” he wrote.
 
But Agnès Bénassy-Quéré, an economist and the director of Cepii, a research group in Paris, said that European governments did not believe they could afford more stimulus spending. “It is clear that what is happening in Europe will weigh negatively on U.S. recovery,” she said.