THE EUROPEAN Union will call on China this week to boost domestic demand and on the United States and Japan to tackle their public deficits as part of global efforts to rebalance growth, an EU document showed.
Financial leaders from the world’s 20 biggest developed and developing economies (G20) meet in Washington this week for talks that are likely to be dominated by risks to global growth and the euro zone’s deepening sovereign debt crisis. The document, obtained by Reuters, sets out the priorities for G20 delegations from the EU.
“Both large external surplus and deficit economies need to take appropriate measures to ensure a rebalancing of global demand,” it said. “The consolidation plans to be undertaken in most EU countries, in the US and in Japan need to be accompanied by appropriate policies in other regions of the world so as to avoid an undesired compression of global demand.”
To prevent this, countries with external surpluses should move to boost domestic demand.
“In this context, the G20 should focus on the role that exchange rate regimes, and in particular the exchange rate of the renminbi, [Chinese currency] should play in rebalancing world growth,” it said.
To involve China, the world’s second biggest economy, more in global economic governance and reflect its growing power, there have been discussions to include the renminbi in the basket that forms the Special Drawing Right (SDR) – an artificial IMF currency.
Advanced economies have set the condition that the renminbi has to be convertible to join and China has no timetable for announcing such full convertibility.
But the tone of the EU document appeared softer, saying currencies that would join the basket would have to fulfil “substantial” rather than full convertibility standards.
By allowing its tightly managed currency to rise, export giant China would also let other Asian currencies, now kept competitively low, to rise, and boost demand in Asia. This could help compensate for lower demand in advanced economies as they curb government spending.
In Toronto in June 2010, G20 leaders, facing market concern about rising debt, agreed to halve budget deficits by 2013.
“The EU considers that the G20 should focus on . . . fiscal consolidation following the Toronto commitments and in particular the need for the US and Japan to adopt credible medium-term fiscal consolidation plans,” the document said.
The EU itself is fiercely consolidating fiscal policy to regain market confidence in the sustainability of its policies.
“Fiscal consolidation is a top priority for all countries in the EU, even though the extent of necessary adjustments differs across the countries,” said the document, endorsed last week by EU finance ministers. – (Reuters)
