GUEST COLUMN: Changing power and responsibility in the world economy

Olli Rehn

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By Olli Rehn
     
      The concept “currency war” has emerged repeatedly in recent public debate. The concept reflects a long-standing trend in world politics, in which the significance of an economic balance of power is emphasised parallel to, and in the background of traditional security.
      Talk of a crisis in the world economy may have blurred the fact that the crisis has affected different parts of the world in different ways.
     
The strengthening of the densely-populated emerging economies has continued and gained strength during the crisis.
      The financial crisis and the economic decline have been primarily a phenomenon of the industrialised countries. When the world’s GDP declined last year by about half a per cent, this was a result of a reduction of output in the developed countries of no less than three per cent, combined with a slowdown of growth in the emerging economies to a quite tolerable 2.5 per cent. The growth in the economies of China, India, and Brazil have been strong, and their relative positions have gained strength.
     
The faster growth in the emerging economies is a natural phenomenon, as they catch up with the developed countries by improving their know-how and their level of technology.
      However, some of the emerging economies also rely on an export-driven economic strategy, which they support by keeping their own currencies weak. This strategy has led to massive current account surpluses in those countries.
      Correspondingly, the current account balance in several developed countries has fallen into a considerable deficit, as is the case in the United States, where growth has been shorn up through light monetary and financial policies.
     
Great global imbalances are a problem for the world economy, and will lead to a process of adaptation before long, which could be linked with dramatic changes in currency exchange rates and a serious economic slump.
      Stable growth would be helped if domestic demand in the surplus countries, such as China, would steadily gain strength. Correspondingly, growth in countries with deficits, such as the United States, should focus on exports, rather than domestic demand, as this would reduce the big current accounts deficit.
      The recent developments in exchange rate policies have heightened the imbalances. In spite of its June decision, China has not allowed its currency to gain strength. The yuan actually weakened during the summer.
     
One of the most topical questions at the moment is how the necessary balance might be achieved and how exchange rate developments can be utilised to support this goal. Functioning international economic policy cooperation is needed. This will not succeed without strong and responsible input from the emerging economies - especially China.
      The upheaval in the balance of power in the world economy was clearly seen in discussions that we had in early October at the annual meeting of the International Monetary Fund in Washington, and when I met with the ministers of finance of China, Russia, and the United States. This week we gather for a meeting of the ministers of finance of the G20 countries in South Korea.
      At the G7 meeting of the ministers of finance of the leading industrialised countries held in Washington, we emphasised that exchange rates should reflect basic economic factors, and that no alterations to exchange rates should be made to strengthen competitiveness.
     
At the EU-China summit we emphasised that it is in China’s own interest to avert the weakening of economic growth in China’s most important export market in Europe. This would be the consequence if the euro zone were to have to bear a disproportionately large burden as a result of China’s currency policy.
      When the economic and financial crisis broke out, cooperation among the G20 countries was of primary importance. Now there seem to be indications of a weakening of the sense of belonging together. This is something that we cannot afford.
     
The EU, for its part, is expecting the G20 to be active in favour of a responsible currency policy, so that imbalances in the world economy could be fixed, while at the same time rescuing and creating millions of jobs.
      That is what is ultimately at stake - saving and creating jobs with better international economic policy cooperation.
      We Europeans must accept that the influence of the emerging economies will gain strength in the world economy. Correspondingly, we have the right to expect that they will start to shoulder their share of responsibility for a more balanced development in the world economy.
     
Helsingin Sanomat / First published in print 22.10.2010
     
The writer is the European Commissioner for Economic and Monetary Affairs


Previously in HS International Edition:
  Olli Rehn: EU growth partly based on illusion (15.10.2010)

Helsingin Sanomat