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The bizarre development at the G-20 summit in Seoul this week was the swing from a relatively generalized coalition critiquing the undervalued renminbi in the run-up to the G-20 session in Toronto in June—which prompted China to make its rate "flexible" again—to the specter of Germany and Brazil united with the Chinese in critiquing the United States because of the Federal Reserve's announcement on quantitative easing, or QE2. (Brazil had been one of the prominent renminbi critics pre-Toronto).
I suspect the US negotiators went a bridge too far by insisting that Germany was in the same boat as China when it came to current account surpluses; in the past, Germany's surplus had been treated as benign because the eurozone as a whole had maintained an approximate balance. The piling-on of critiques of the United States further escalated as a consequence of political change in the United Kingdom, where Keynes is now apparently definitively out, and the new prime minister is lecturing the United States that fiscal adjustment should not wait for a return to full employment.
More fundamentally, like commodity prices, the disarray at Seoul may be seen as a sign of global recovery. Squabbling is apparently a luxury good the leaders realized they could not afford at the crucial London summit in April 2009, but think they can now. And yes, even though the Fed gurus treat QE2 as a straight-forward extension of monetary policy, not fundamentally different from reducing interest rates, enough finance ministers around the world have enough economic training to worry about central bank financing of fiscal deficits as the path to banana republic inflation.
With inflation at only about 1 percent, that worry is misplaced, but the traditional fear of inflationary consequences of printing money—especially in Germany for historical reasons—made it easy to paint the United States as a new source of global monetary destabilization. Instead, G-20 leaders should have focused on the point that President Obama correctly emphasized: Restoring US growth is the best thing US policymakers can do for the global economy.
