Can the G-20 Save the World?

Köhler stood there and said that this crisis is a "test for democracy," that "we have all lived beyond our means" and that what we need now is a "strong state that sets rules for the market." Almost everyone approved of Köhler's passionate words. But what should those rules be? And when will all of these additional responsibilities begin weighing this state?

Germany, as the world's top exporting nation, has been especially hard-hit by the global downturn. Hardly any other country has profited as much from the worldwide boom in the past few years, but now the tables have been turned. According to economists at Commerzbank, the German economy could shrink by as much as 7 percent this year. And prognoses warn that unemployment could exceed 4 million by the end of the year, possibly even approaching 5 million next year.

Currency Market Disruptions

The outlook is equally grim in the United States, where the economy shrank by 6.3 percent in the fourth quarter of 2008. The faltering of the biggest economy on earth leads to massive disruptions in the foreign currency markets, souring the mood leading up to the G-20 summit. Oddly enough, this topic is not even mentioned in the draft of the London final communiqué.

But it plays an important role, because China also suffers from a decline in the value of the dollar. The People's Republic holds the largest dollar reserves outside the United States, well over $1 trillion (€740 billion). The Chinese, for their part, can only look on as their hard-earned foreign currency reserves lose value from one day to the next.

And there is no end in sight, as the Chinese leadership notes with concern that the Americans are doing whatever they can to bring down the value of the dollar even further. Each additional billion that Treasury Secretary Timothy Geithner pumps into the economic cycle as part of his many bailout programs devalues China's dollar reserves. The currency strategists in Beijing know all too well that when it comes to their reserves, the worst is yet to come. It is already apparent that inflation will shoot up in the United States as soon as the economy begins to turn around. Ultimately, Obama can only finance his costly bailout and stimulus programs by printing money, which in turn reduces the currency's value.

Back to the Bad Old Days?

Experts believe that the current policy of easy money could catapult inflation to upwards of 10 percent in two or three years. However, the Federal Reserve and the Treasury Department in Washington have little reason to oppose this development. Inflation devalues debt, making it easy to pay down exploding government debt.

In light of these scenarios, the Chinese believe, America's vanishing currency no longer deserves its status as the world's benchmark currency. Last week, Beijing surprised the world with the proposal that the dollar be replaced as lead currency by the so-called Special Drawing Rights of the IMF, an artificial reserve asset made up of the dollar, euro, yen and British pound.

Even though the proposal will not be on the agenda on April 2, it does reveal a growing gap between the dominant economic power, the United States, and its challenger, China. The G-20 summit is perceived, at least by Washington and Beijing, as a sort of G-2 summit.

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