MercoPress. South Atlantic News Agency

G-20 drafts a “standstill” compromise declaration to avoid protectionism

President Lee Myung-bak, host of one of G-20 most challenging summits

Leaders of the Group of 20 (G20) member nations meeting in Korea are expected to reach a compromise Friday on trade and currency issues that have so far marred the spirit of the global gathering, in a bid to make headway in the G20 process and keep the two-year-old global policy forum afloat.

The G20 Summit began Thursday amid deep divisions among member economies, with currency tensions simmering as world leaders gathered in Seoul for the two-day summit.

They started the summit with a two-hour working dinner at 7:00 p.m. at the National Museum of Korea following President Lee Myung-bak’s welcoming remarks, with the focus on the global economic framework.

The Seoul Declaration to be signed Friday by the heads of 19 states and the EU may include a couple of measures to prevent currency disputes, a “standstill declaration” to avoid protectionism, and the Korea Initiative, which addresses a global financial safety net and development issues.

The declaration is likely to fully endorse the joint statement agreed upon by finance ministers in Gyeongju last month, but a clear solution to thorny issues involving foreign exchange rates and trade balance is not expected due to wide differences between the U.S. and China.

“G20 nations have so far agreed to fully endorse most of the agenda agreed upon at the Gyeongju meeting, including the BASEL III, IMF reform and a macro-prudential policy framework — tools to help mitigate the impact of excessive capital flows and the reflection of the perspective of emerging market economies in financial regulatory reforms” said a ranking South Korean government official asking not to be named.

“But they are struggling to narrow differences on foreign exchange and current account balance issues. I think that an agreement will be reached at the very last moment by the leaders on Friday,” he added.

In the communiqué released after the Gyeongju meeting, finance ministers agreed to move toward more market determined exchange rate systems and refrain from competitive devaluation of currencies. They also agreed to have the IMF set an “indicative guideline” of a current account balance for each nation, a measure that was designed to fix the global imbalance of growth.

The U.S. called for a numerical limit but the move met a strong backlash from countries such as China, Japan and Germany. U.S. Treasury Secretary Timothy Geithner had urged each country in the G20 to adopt numerical targets to limit excesses in trade surpluses or trade deficits.

Instead of setting a specific target on current account balances, G20 countries may agree to announce a detailed action plan with the IMF to set up an early warning system to check for excessive imbalances.

Yonhap News Agency quoted a government source as saying, “Because of opposition, G20 leaders may agree on a compromise that calls for a resolution to the currency feud before the next G20 meeting takes place in France in November next year. A so-called Seoul Action Plan that could recommend country-specific currency and current account policies may be included in the statement at the conclusion of the summit.”

The French finance minister hinted Thursday that G20 leaders will not come up with a clear solution to the currency issue at the Seoul summit.

“Reforming the international monetary system is not something that is going to happen overnight. This is not going to be concluded and finalized tomorrow” pointed out Christine Lagarde, French Economy Minister.

“It will take a lot of time and many months to come before we arrive at a system that is satisfactory, that is more settled, that is safer and that is less volatile,” she said.

Regarding the global financial safety net, she said, “There will be multiple proposals, guidelines and tools to reconcile national economic policies bearing in mind the spill-over effects that could either benefit the process or cause a drawback”.

Along with the move to reduce the global imbalance, G20 nations are expected to support agreements reached in Gyeongju to increase the capital ratio of banks and strengthen regulations on systemically important financial institutions (SIFIs).

The leaders are also expected to support the IMF decision to shift a 6% voting rights from rich countries by January 2013. Other measures to be included in the declaration are universal calls for a “standstill” on all forms of protectionist measures that can affect trade.