In the run up to the G20 summit in Seoul next week, expectations are rising that the world's leaders would, and should, send a strong signal that they can work together. Like the London summit, there is a need for strong reassurance that the world economy is not left to its own devices. Even if the probabilities attached to the burst of a currency war are still low, the threat of it, and of the protectionist response that this might trigger, is creating uncertainty and tension. And the recent decision by the Federal Reserve to extend quantitative easing and buy government debt for a total amount of $ 600 billion with newly created money has exacerbated the sentiment that the US is trying to shift the burden of its domestic adjustment on other countries, especially the developing economies.
Will the Seoul Summit end up in tears, with China accusing the US of irresponsible behaviour and the US bashing China for free riding on a low exchange rate? China and the US are the two main players in Seoul, and any skirmish between them will adversely affect the summit's outcome.
There are, however, some positive indications that suggest a neutral and even positive conclusion in Seoul. First and foremost, protracted tensions that could negatively impact on confidence and therefore on economic activity are in nobody's interest. In Seoul, both the US and China will measure their words to avoid generating tensions. They may even go further and show willingness to listen to each other. So, nobody wants to be seen as spoiling the party.
The agreement to reduce current account imbalances that was reached by the G20 finance ministers and central bank governors in a preparatory meeting a few weeks ago is another relatively reassuring move. The next step is to further qualify such a proposal and to work out which policy tools - from surveillance to mutual assessment and peer review - would be the most appropriate. Unfortunately there is not enough time to put together any concrete proposal. Hence, Seoul is likely to generate wishful thoughts, but no useful solutions to address current account imbalances.
To move from neutral to positive outcome the G20 leaders should send a bold message and a concrete proposal to pin their commitment to multilateralism. For instance, the pledge to bring to conclusion, one way or the other, the Doha Development Round within 2011 - perhaps under the leadership of the European members of the G20 - would make a concrete statement about multilateralism and free trade. And a common view on the need to coordinate exchange rate policies will put an end to the rhetoric of 'currency wars' and give some concrete meaning to the concept of being responsible players. This is perhaps the best case scenario that, however, cannot be completely ruled out.