Geithner Calls for Global Cooperation on Currency

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Treasury Secretary Timothy F. Geithner spoke at the Brookings Institution in Washington on Wednesday.

By SEWELL CHAN

WASHINGTON — Treasury Secretary Timothy F. Geithner warned on Wednesday that the necessary rebalancing of the economy was “at risk of being undermined” by countries trying to prevent their currencies from rising in value.

Mr. Geithner, in a speech at the Brookings Institution, said some of the world’s biggest economies should “focus on strengthening growth, rather than risking a premature shift to restraint” by cutting government spending too rapidly.

His message — aimed at countries like China and Germany, but also an appeal for support from other major economies — came as the International Monetary Fund predicted that the world economy would grow 4.2 percent next year, down from the estimate of 4.8 percent for this year, but that “a sharper global slowdown is unlikely.”

As finance officials from around the world gather here this weekend for the annual meetings of the I.M.F. and the World Bank, American officials are concerned that the degree of cooperation in the recent financial crisis is eroding. In particular, the Obama administration is looking to the I.M.F. to help bring about what months of negotiations have failed to achieve: greater exchange-rate flexibility by China.

Instead of the “competitive devaluation” of the 1930s, which exacerbated the Depression, the world faces a threat of “competitive nonappreciation,” Mr. Geithner said, citing a term coined by Edwin M. Truman, a former official at the Treasury and the Federal Reserve.

That was a reference not only to China but also Japan and Brazil, which have taken steps recently to prevent their currencies from rising in value.

“Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies,” Mr. Geithner said.

“The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.”

In his speech, Mr. Geithner called the problem a “damaging dynamic” and a collective problem that “requires a collective approach to solve.”

Later, in a question-and-answer session, Mr. Geithner said that “China will be less likely to move, to allow its currency to appreciate more rapidly, if it’s not confident that other countries will move with it.”

China did not appear to be in the mood to be flexible on Wednesday. In Brussels, Premier Wen Jiabao criticized European Union leaders who have called for a stronger Chinese currency. “Europe shouldn’t join the choir,” he told a business conference, according to Bloomberg News. If the renminbi “isn’t stable, it will bring disaster to China and the world.” If China were to increase the renminbi “by 20 to 40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil.”

Mr. Geithner’s warnings were echoed, in crucial respects, by the I.M.F., which released its latest World Economic Outlook on Wednesday.

“The world economic recovery is proceeding,” the I.M.F. chief economist, Olivier J. Blanchard, said at a news conference. “But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries.”

As many as 210 million people worldwide may be unemployed, an increase of more than 30 million since 2007, the report found. Three-fourths of the increase has been in the most-developed economies.

In those advanced economies, growth is now projected at 2.7 percent for this year and 2.2 percent for next year — compared with 7.1 percent and 6.4 percent, respectively, for emerging and developing economies.

Developing Asia, which does not include Japan, South Korea and Taiwan, is expected again to lead the world in growth, with projected rates of 9.4 percent this year and 8.4 percent next year.

The fund left its growth projections for China — 10.5 percent this year and 9.6 percent next year, the highest of any major economy — unchanged from July.

The fund slightly revised downward its projections for the United States, whose economy is projected to grow 2.6 percent this year and 2.3 percent next year. The euro area’s economy is expected to expand 1.7 percent this year and 1.5 percent next year.

The European projections were a slight uptick from July projections, largely on account of stronger-than-forecast growth in Germany, whose economy is expected to expand by 3.3 percent this year and 2 percent next year.

The biggest economies need to carefully calibrate efforts to restrain government deficits and debts without derailing the recovery by cutting off fiscal support too sharply, Mr. Blanchard said.

“If growth were to slow or even stop in advanced countries, emerging market countries would have a hard time decoupling,” he said, emphasizing the interconnectedness of the world economy. “The need for careful design at the national level, and coordination at the global level, may be even more important today than they were at the peak of the crisis a year and a half ago.”

In his remarks at the Brookings Institution, Mr. Geithner suggested that the European debt crisis had caused an overreaction.

“What happened in Europe in the spring was very, very damaging,” he said. The euro zone nations “took a long time, far too long” to agree to support their most heavily indebted members. The result, he said, was doubts about “whether Europe had the will or the ability to stand behind their members” and “an exaggerated shift” toward restraint in the healthier, bigger economies.

Mr. Geithner said it was critical to distinguish countries like Greece, Ireland, Portugal and Spain, which he said “had no choice but to move very, very aggressively” to cut spending, from bigger, less indebted economies like the United States, which continue to enjoy very low interest rates for long-term borrowing, giving them more short-term room to maneuver.

But he also conceded that it was imperative for Congress and the administration to reach agreement on long-term measures to reduce the American deficit and stabilize the nation’s public debt level.