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Business

Currency likely to take center stage at Seoul G20 summit

The annual G20 summit starts in Seoul on Thursday, and artificial currency manipulation is likely to be a central issue. In addition to keeping the "global currency war" from escalating, a common goal must be reaffirmed.

The convention center in Seoul where the G20 Summit will be held

The G20 summit starts in Seoul on Thursday

The sheer scale of the Group of 20 (G20) summit can be staggering. Representing 90 percent of the world's economic power, and four-fifths of global trade, the summit is crisis-oriented. It was called into life in 1999 as a reaction to financial crises in Asia, Brazil and Russia, and was initially a meeting of financial ministers.

When Lehman Brothers investment bank collapsed in the fall of 2008, it unleashed a global financial crisis, and the G20 became a vehicle to combat recession. That's when heads of state became involved.

It has been nearly two years since a package of financial measures was decided on in Washington. Their aim is to ensure such an unprecedented global crisis never happens again.

Dominique Strauss-Kahn

Dominique Strauss-Kahn says global cooperation is needed

For Dominique Strauss-Kahn, a French politician and Managing Director of the International Monetary Fund (IMF), the most important realization of the crisis is that egoism on the national level needs to yield to global cooperation.

"In my view one of the main features of this crisis has been the emergence of a willingness to work together, of a new kind of economic cooperation at the global level which never existed, never happened in the past," Strauss-Kahn said in October at the annual meeting of the IMF in Washington.

According to Strauss-Kahn, that spirit of cooperation was present at past G20 summits in London, Pittsburgh and Toronto. But the meeting starting Thursday in Seoul may show a decrease in countries' willingness to cooperate at a global level.

"That is a real threat… there is no domestic solution to a global crisis," he said.

Summit as a litmus test

The G20 summit participants surely know global cooperation is the way forward. In the end, however, each country has to master its own national politics in order to institute financial reform.

That's why German Chancellor Angela Merkel says she isn't satisfied with what has been accomplished so far.

Angela Merkel addresses German Parliament in October

Angela Merkel isn't satisfied with what has been accomplished so far

"In terms of the financial sector's participation in carrying the costs of the crisis, the German government could have pictured more," she told German parliamentarians in October as she outlined her goals for the Seoul gathering.

While Germany imposed a nationwide "Financial Crisis Responsibility Fee" on its banks, the G20 failed to agree on an international tax on financial markets.

Nevertheless, Europe will be bringing something to the table in Seoul: its oversight of financial systems will be significantly improved. Risky financial products may be forbidden under certain circumstances and control over hedge funds and ratings agencies is being tightened.

European Commission President Jose Manuel Barroso has expressed concerns about the Seoul G20 summit. He says it comes at a critical point in time, as all parties will have to accept that global economic imbalances affect them all.

"It will be a real test of whether the G20 can deliver the coordination the world economy needs," he wrote in an open letter.

No hint of unity

Despite numerous promises to disallow protectionism, the G20 nations are far from unified in their efforts to do so.

Each is primarily acting with the strength its own domestic economy in mind, and the resulting imbalance is fertile ground for another crisis. The trade balances of the individual countries – the ratio of their exports versus imports – is filled with dormant potential for conflict.

Frankfurt skyline

Germany imposed a fee on its banks, but an international tax was not agreed on

In outlining her goals for the Seoul G20 summit, Merkel asked what countries can "do together for sustainable, strong and balanced growth." She wants to see this entirely accomplished by unadulterated market forces as such balances are an expression of economic competitiveness.

No answers on currency

Currency exchange rates are an inevitable source of controversy in the current scenario of global trade, and some analysts have already dubbed the situation a "global currency war."

The problem is that some countries are trying to gain a competitive edge by devaluing their own currencies to make exports more attractive. China and the United States are the primary practitioners of this tactic, with South Korea, Japan and Brazil jointing in too. A precarious race has begun.

The Seoul G20 summit won't solve this problem, but Merkel says that exchange rates should accurately reflect the fundamental data of a country's domestic prosperity for the time being.

"A political scenario which targets currency distortion to strengthen economic competitiveness must be avoided," Merkel said.

France, which is due to take over South Korea's presidency of the G20, wants to make currency policies a central issue.

Still, one central issue may be the most important of all during the talks – whether the 20 nations can demonstrate they are all moving in the same direction, even if they were forced into negotiations by a crisis.

Author: Henrik Boehme (gps)
Editor: Sam Edmonds