Trade summit exposes friction as leaders ‘put recovery at risk’

The world is shifting into a “dangerous” phase of unilateralism in currency and trade relations, the world’s leading banks have warned after a fractious summit of ministers in Washington.

Josef Ackermann, chairman of the Institute of International Finance and chief executive of Deutsche Bank, said that some leaders were pursuing narrow national or regional interests that could damage a “fragile” world recovery.

His words came after ministers failed to reach a deal to reduce the risk of a currency “war” between leading nations and overhaul the governance of the International Monetary Fund.

Finance ministers agreed to bolster the IMF’s role in monitoring economic “imbalances” between countries running large trade surpluses, such as China, and those with large deficits, led by the United States. But with big economies still arguing over exchange-rate movements, Youssef Boutros-Ghali, chairman of the policy-steering committee of the IMF, admitted that “there are frictions, obviously”.

Raising the stakes further, countries are still struggling to overhaul the distribution of chairs held by IMF member countries. Some European Union nations are reluctant to surrender influence in the IMF, but concessions are essential if the fund is to reflect the growing economic heft of emerging nations and bolster its legitimacy as the best forum to resolve economic differences.

Dominique Strauss-Kahn, managing director of the IMF, said that he did not want to “raise expectations” for forthcoming meetings of the G20 group of leading nations in South Korea. He said: “The real problem, as we said before, is the rebalancing question.”

Mr Ackermann said: “Economic recovery continues to be fragile in many mature economies and we are now seeing some dangerous trends in some capitals towards unilateralism in economic, currency and trade policies.

“It is crucial that in the preparations for the G20 summit in the weeks ahead, and at the Seoul summit itself, no effort is spared by the official authorities to address these issues in a highly co-ordinated, multilateral approach.”

The annual IMF and World Bank meetings in Washington came after weeks of escalating tensions over economic policy, amid concerns that some countries have been attempting to obtain a competitive advantage by suppressing their currencies. China’s continuing management of the value of the yuan is a key concern.

Observers expressed acute disappointment over the lack of apparent progress, with sniping over currency policy dominating the meetings. Mark Fried, of Oxfam, said: “Thousands of people have flown in from all over the world for these meetings and there’s been no movement on any issues of significance.”

The IMF said that it was stepping up its surveillance of the United States, the eurozone, Japan, China and Britain because of the “spillovers” that their economic activities have on the rest of the world.

The Fund’s legitimacy is still marred, though, by an underrepresentation of emerging markets at its top table. Mr Strauss-Kahn said that there could be agreement on this topic within days or weeks, but he acknowledged his frustration over the slow progress, saying: “There is only one obstacle, which is the agreement over the members. We are going to get it.”

Separately, the World Bank urged countries not to pare back their funding for low-income countries, saying that failure to raise enough money in the present funding round would “devastate” poverty-alleviation goals.

The previous round of funding was worth $42 billion but with big donors facing straitened public finances, there are concerns about the amount of money that will be raised this time.