–Repeats Need For Major Emerg Econs To Move To More Flex FX Regime

WASHINGTON (MNI) – The following is the first part of U.S. Treasury
Secretary Timothy Geithner’s prepared remarks Wednesday at the Brookings
Institution in Washington:

This weekend, finance officials from around the world will gather
in Washington, along with the senior management of the International
Monetary Fund and World Bank. The G-20 Finance Ministers and Central
Bank Governors meet in Korea later this month, followed by the G-20
Heads of State in November.

I want to outline our objectives for these meetings.

A Period of Unprecedented International Cooperation

Two years ago, the world economy was in the grip of an economic
crisis on a scale not seen since the Great Depression.

The United States and its partners in other leading economies, in
an unprecedented feat of peacetime economic cooperation, joined forces
to launch a powerful, dramatic response.

Together, we put in place a powerful program of financial support
classic fiscal measures of tax cuts and investment, combined with
monetary policy actions by central banks, and a variety of creative
actions to stabilize our financial systems to bring the global economy
out of freefall and on a path to growth.

We mobilized hundreds of billions of dollars in financial support
for and through the international financial institutions for investments
in emerging and developing economies.

We committed to keep markets open to trade and investment, and
together we honored that commitment in the face of strong political
pressure.

We came together to embrace a common framework for reform of the
global financial system.

We passed sweeping reforms of the U.S. financial system, and the
world’s central banks and supervisors reached agreement just two weeks
ago on a very tough set of global standards for capital to limit
leverage in the major global financial institutions.

These decisions required considerable trust and political resolve.
And they have been effective in restarting economic growth and
stabilizing financial markets. Global trade is now almost back to
pre-crisis levels.

Each of our economies is stronger today than would otherwise have
been possible, because of the effectiveness of this joint strategy. And
the financial reforms now underway will substantially reduce the risk of
damage from future financial crises.

The Growth Challenge

What are the main challenges ahead?

The most important policy question we confront together is how to
strengthen the pace of growth and repair, and how to do so in a way that
provides the basis for a more balanced and therefore more sustainable
global economic recovery.

This is not a challenge that is best resolved by nations acting
independently. In the heat of the crisis, we all recognized that our
actions would be more powerful if we acted together. Even though the
most dangerous part of the crisis is behind us, we are still in a place
where we can achieve better overall growth outcomes if we make policy in
a cooperative framework.

I want to offer a few suggestions on the policy challenges ahead in
three areas: growth, exchange rate cooperation, and reform of the
architecture of economic cooperation.

First, on economic growth. The IMF forecasts the world economy
will grow at a respectable annual rate of around four percent in 2011.
Growth is very strong in many of the major emerging economies. In the
major advanced economies, however, output and employment are still
substantially below the pre-crisis levels, and the pace of recovery has
been slower, with economic growth now running at a pace that is close to
potential growth rates and not rapid enough to repair quickly the
substantial economic damage remaining from the crisis.

Economic recoveries that follow financial crisis are typically
slower than those that follow other types of recessions. This is
because of the headwinds to growth that are generated by the necessary
adjustments in asset prices and in reducing financial leverage. As
financial institutions rebuild their balance sheets and households
reduce debt and raise savings, spending is slower to recover. Firms,
cautious after being burned by the financial panic, are less willing to
invest and to hire because of uncertainty about future strength in
demand for their products.

Different economies face different challenges and different
constraints on the scope for economic policy to strengthen growth.
However, concern about the near-term limits to more growth-oriented
economic policies are greatly exaggerated. Most of us still have the
capacity to take additional actions that would improve both short-run
and long-run growth prospects.

The greatest risk to the world economy today is that the largest
economies underachieve on growth. We need to continue providing
well-targeted support for the recovery in the near term even as we put
in place plans to help ensure fiscal sustainability over the longer
term.

And for the recovery to be sustainable, there must also be a change
in the pattern of global growth. For too long, many countries oriented
their economies toward producing for export rather than consuming at
home, counting on the United States to import many more of their goods
and services than they bought of ours.

The United States will do its part to achieve this adjustment.
Private savings have increased significantly, and, as the recovery
strengthens, we will bring down our fiscal deficits to a sustainable
level.

But as America saves more, countries overly reliant on exports to
us for their own growth will need to change their policies, or else
global growth will slow and all of us will be worse off. Countries that
chronically run large surpluses need to undertake policies that will
boost their domestic demand.

The flexibility each major economy has to provide a greater
catalyst to growth in the near term or to slow the pace of near-term
fiscal restraint depends on the size of its long-term fiscal problems
and the credibility of its plans to address those problems over the
medium term. Even if the risks to a sustained global recovery look
relatively low, it makes sense for policy makers in the major economies
to continue to focus on strengthening growth, rather than risking a
premature shift to restraint.

That brings me to the second policy challenge: we believe it is
very important to see more progress by the major emerging economies to
more flexible, more market-oriented exchange rate systems. This is
particularly important for those countries whose currencies are
significantly undervalued.

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** Market News International Washington Bureau: 202-371-2121 **

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