G20 leaders paper over cracks on US stimulus tapering

World leaders yesterday sought to contain tensions over the global economy, as advanced economies agreed to carefully manage the wind-down of its massive monetary stimulus and developing countries backed free trade and tax co-operation.

Anxieties in emerging economies about the impact on currency and other financial markets of the US Federal Reserve's anticipated "tapering" of its $85 billion per month bond-buying programme dominated the lead-up to this week's G20 summit.

But the leaders gathered in St Petersburg managed to formulate language to paper over the widening cracks in the global economy. As recovering rich countries begin to end ultra-loose monetary policy, the effects are being felt in the developing world as investors withdraw funds, putting pressure on currencies and financial markets.

Cordial
US officials said that while quantitative easing (QE) appeared to dominate the public statement of G20 countries at the summit such as China, Brazil, and India, the discussion within the summit walls was cordial overall, with most G20 members acknowledging that what is good for the US is good for global growth overall.

A senior US administration official said: “The general recognition was really that the US was in a position of strength in the world economy and lending strength to the world economy. And has accomplished this by putting growth first.”

India, which has seen a collapse in the rupee, wanted tough language stressing the need for the US in particular to take heed of the havoc that could be caused by speedy or unexpected tapering of QE.

The G20 communique spoke of the need for western central banks to “carefully calibrate and clearly communicate” shifts in monetary policy to contain global risks. The US and other advanced economies have said the problem of adjustment to the new phase in global growth is largely one of lack of economic reforms in some countries that have been hit by turbulence.

Reforms
The communique suggested the US should think beyond its domestic borders when tapering its QE programme. However, it also reflected the view of advanced economies that those countries worst affected by turbulence had to make reforms: "Sound macroeconomic policies, structural reforms and strong prudential frameworks will help address an increase in volatility."

Meanwhile, after tense discussions in St Petersburg, world leaders agreed to extend from 2014 to the end of 2016 a moratorium on any new protectionist measures, in spite of opposition from Brazil and Argentina.

Vladimir Putin, Russia's president and the summit's host, was backed by China in pushing for an ambitious commitment to free trade, with the US and Britain also working behind the scenes to secure the 2016 target.
– (Copyright The Financial Times Limited 2013)