G7 parades its irrelevance

The meeting of the finance ministers of the Group of Seven (G7) nations is increasingly looking as irrelevant as the final of the US baseball World Series that began this week. Whoever wins the title of best baseball team, the rest of the world shrugs as, by and large, it does not play the sport or take part in the contest. Even the term “world series” is seen as hubris.

The latest communiqué from the G7, which called on China to allow an “accelerated appreciation” of the renminbi, led to predictable headlines. It was “the mostly strongly worded statement yet”, one said. The problem is that the G7 is a tournament that China does not participate in. Its members – Canada, France, Germany, Italy, Japan, the US and UK – met in Washington, DC, to debate the implications of the falling dollar.

The three eurozone countries, and France in particular, were angry that the euro has taken the brunt of the dollar’s depreciation. The single currency has soared by 7.8% so far this year, putting pressure on the euro zone’s exporters and threatening, politicians claim, to stifle the economic recovery. They want co-ordinated action to stem the fall in the dollar that they fear could turn into a full-scale rout that could destabilise the world economy.

That was never going to happen and the Europeans probably knew that. It is fruitless to intervene to prop up a currency when the markets are determined to sell it. Even as finance ministers started their meeting the key index of the dollar’s value slumped to a lifetime low against the euro of $1.4319 as poor US housing data raised the chance of another cut in interest rates on 31 October to 92%.

The next best for the French was public statement demanding that China let the renminbi against the dollar appreciate to take the pressure off the euro. To add salt to the wound, while the renminbi is firmly pegged to the dollar it has actually fallen 11.4% against the euro.

China, of course, will ignore the message from the communiqué, sticking to its long-held line that it needs to complete major reforms of its financial system before adjusting the exchange rate. It can also be forgiven for refusing to take advice from a group of which it is not a member. The G7 yet again spurned the opportunity to reform itself and open the way for countries such as China to join.

The last time the G7 attempted to play God in the currency markets was in 2000 when it stemmed the euro’s decline. Back then it represented two-thirds of world GDP. According to Alliance Trust, a financial services group, that could fall to a third by 2050. That might be more significant that World Series baseball but it is hardly a mandate to supervise world exchange rate policy.