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22nd May 2006 OECD warns on global imbalances

Article - OECD warns on global imbalances
The Organisation for Economic Cooperation and Development (OECD) has warned that the global imbalances in world trade are unsustainable and must be tackled.

Opening the global think tank's annual forum, Greek finance minister George Alogoskoufis said the situation posed major risks to global economic stability.

He told reporters that although it was too early to talk of a "crisis" in the markets, recent falls in global stock and currency markets could be the beginning of a "correction" based on uncertainty about the future direction of interest rates.

And in a barely veiled criticism of the United States he called for greater international economic policy coordination to prevent large countries abusing their position and practicing "beggar-my-neighbour policies".

Policy coordination, particularly on currencies, was "looser" than it had been in the past, he said.

Fears about the growing size of the US current account deficit and budget deficit are roiling stock markets around the world.

"The large extent of deficits of some countries, combined with the surpluses of their trading partners and the oil-producing countries, can pose considerable risks to global economic stability, so it is crucial that we do something about them," Mr Alogoskoufis said.

Some of these imbalances "are clearly not sustainable and will have to be addressed in an effective manner as soon as possible," he added.

His comments were echoed by the president of the European Central Bank, Jean Claude Trichet, who also addressed the OECD meeting.

Mr Trichet urged Europe to continue on the path of economic reform, modernising labour markets to make them more flexible, creating more competition between firms, and boosting innovation to help bridge the gap between Europe and the US in terms of productivity growth.

But he also said the EU was not complacent about global economic problems, and that reform in Europe was its contribution to "the orderly unwinding" of such global imbalances.

He pointed out that such reform would boost global growth, but in return Europe "fully expected the cooperation of its other global partners" who should "do their homework".

Markets have recently become worried that the growing US trade gap is unsustainable, and there is concern that a sharp fall in the dollar would boost US exports while unraveling Europe's tentative economic recovery.

There is also concern that the US budget deficit is unsustainable in the long-term, and that tax increases are needed both to balance the Bush administration's budget and reduce US consumers' insatiable demand for foreign goods.

But the outgoing head of the OECD, Secretary-General Donald Johnston, said there had been a remarkable growth in consensus over the past 20 years since he first worked in the organisation on macro-economic policy.

He said that there were still a number of key forums in which economic policy coordination was taking place on a regular basis, including the Basle group of central bankers and the G7 finance ministers, representing the world's richest industrial countries.

In fact, it was the concern expressed by G7 finance ministers at their April meeting in Washington that began the slide of the dollar.

They warned that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth", and urged the US to cut its budget deficit and China to adjust its currency.

Meanwhile, US Treasury Secretary John Snow denied on Monday that the US favoured a weaker dollar, but said that "currency values should be set in open, competitive currency markets, to be in line with underlying supply and demand and market forces".

He added that neither the US nor other key trade partners should follow "beggar-thy-neighbour" currency policies.

The biggest trade imbalances are between the US and China, whose currency does not float freely in international currency markets.

China has been resisting US pressure for a major revaluation of the yuan, fearing it would hurt its export-led economic growth and discourage inward investment.

But despite its huge economic importance, China is not a formal member of the G7 or OECD - something that this year's meeting hopes to address.

The G7 comprises the US, UK, Japan, France, Germany, Italy and Canada.

By Steve Schifferes
BBC News economics reporter at the OECD in Paris

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