The IMF Spring Meetings and the G-20: Questions Still Left Unanswered

For the first time in the history of the International Monetary Fund’s ministerial committee, an Asian will preside over this Saturday’s meeting of the IMF. Supporters of the nomination of Tharman Shanmugaratnam, minister of finance of Singapore, included the IMF’s own managing director, Dominique Strauss-Kahn, who has for some time aimed to heal the wounds that the fund had created in the region during the Asian crisis of the late 1990s.

Tipping the balance in Shanmugaratnam’s favor was the expectation that this may facilitate a better dialogue between Washington and Beijing and leverage the traditional bridging role between the East and West that Singapore has played in the past.

Trained as an economist in the United Kingdom, the 54-year-old Shanmugaratnam boasts considerable clout among Washington policy circles, who have long appreciated his ability to modernize the Singaporean financial sector and his methodical and forward-looking nature that is typical of the Asian-Tiger technocrats. These strong traits are already apparent as he prepares the schedule for the upcoming spring meeting.

The spring meeting is bound to intersect, if not openly overlap, with that of the G-20 finance ministers’ meeting taking place just at the eve of the ministerial meetings at the IMF.

At the top of the agenda for the G-20 and the IMF is the issue of global imbalances, against which U.S.-China relations have long been measured.

Expectations are that the finance ministers will approve a set of guidelines defining the macroeconomic variables to use for monitoring global current account imbalances. These are guidelines that both the G-20 and IMF have been working on since November G-20 Summit in Seoul.

In contrast to the U.S. proposal put forth last October at the G-20 ministerial meeting in Korea, there will be no mention whatsoever of numeric targets or ranges of any kind, in deference to pressure by the Chinese and, behind the scenes, the Germans.

In following this agreement, the G-20 will ask the IMF to conduct consultations with countries that are seen to be key players in the quest to reduce global imbalances.

The approach is one of knowing the outcome ahead of time, at least as far as the United States and China are concerned. The German high current account surplus will instead be lost in the roughly on balance euro area current account.

The IMF will have until the end of summer to propose corrective measures to the countries in question, when the initiative is handed over to G-20 political leaders.

With regard to the suggestion last fall by the U.S. Secretary of the Treasury Timothy Geithner—who proposed the formulation of numeric values to serve as the basis for identifying economies that should have put adjustment measures in place—the path chosen by the G-20 seems to be a tactical retreat until the next U.S.-China Strategic Economic Dialogue summit takes place at the beginning of next month and the Cannes G-20 Summit scheduled for next November.

At that time, G-20 heads of state and government will have all the elements needed to draft a political compromise, for which G-20 finance ministers and central bankers will have exhibited little room for maneuver.

Meanwhile this week, negotiations are underway for the definition of a third package of financial assistance in less than a year to a euro-area country—this time Portugal.

As Portugal awaits the rescue package, there is more than a sense that the euro is contributing to heighten downside risks to a much-awaited global recovery.

The real fear that no one will openly admit is that the euro area may be closer to a systemic crisis against which it has so far developed modest instruments.

The prospects for the euro area are not formally on the agenda of the G-20 and the IMF meetings this week but will certainly be a critical item for discussion.

Portugal may not be the last euro area country to seek international assistance.