D+C Newsletter

Dear visitors,

do you know our newsletter? It’ll keep you briefed on what we publish. Please register, and you will get it every month.

Thanks and best wishes,
the editorial team

Register

Global leadership

Informal power centre

by Kathrin Berensmann, Thomas Fues, Ulrich Volz
The USA and China have been at odds over exchange rates for a decade: a 100 dollar bill shown in the window  of a bank in Beijing

The USA and China have been at odds over exchange rates for a decade: a 100 dollar bill shown in the window of a bank in Beijing

Of all discussion forums which bring together industrial nations and emerging-market countries, the G20 is the most important. Its relevance has grown fast since the global financial crisis started. The G20 still does not have a joint concept for making the global economy crisis-proof, but the group’s influence is becoming evident in many policy areas. By Kathrin Berensmann, Thomas Fues and Ulrich Volz

The G20 was established in December 1999 at the instigation of the G7 finance ministers. It was initially formed as a forum for regular meetings of finance ministers and central-bank governors. After the collapse of Lehman Brothers, the investment bank, in autumn of 2008, the model was changed, and G20 meetings for the heads of state and government became a regular feature.

The G20 has thus superseded the G8 as the most important informal discussion forum for global economic issues. The G20 is meant to play a role in stabilising the international financial architecture and capital markets, but it will also have a bearing on other issues related to international cooperation, global growth and development.

It remains unclear at this stage what role the G20 will assume in the multilateral architecture, and how it will relate to other informal and formal international institutions. The mere existence of the G20 means that legitimate international organisations such as the United Nations are being bypassed. Some even speak of a “reinforcement of the rule of the powerful”.

Others, however, bemoan that G20 resolutions ­are not legally binding. The G20 considers itself essentially­ a forum for debate rather than a decision-making body. Its purpose is to facilitate the negotiation of compromises in various areas of global policy, thus serving as a preliminary stage to formal resolutions in legitimate global institutions such as the UN. One example of this approach was governance reform at the International Monetary Fund (IMF). The de­cision was made at the G20 meeting of finance ministers and central-bank governors in Gyeongju a few weeks before the Seoul summit, but it was formally approved by the IMF’s Executive Board.

Input on global policy

In this way, the G20 can play a constructive and helpful role in the provision of global public goods. Glo­bal-development issues such as fighting poverty and overcoming social exclusion are on the G20 agenda (see box on p. 20). In view of the ongoing global financial crisis, however, coordinating international economic policy will stay the most important G20 topic for the time being.

The start was promising. At the first summits of heads of state and government in Washington in November 2008 and in London in April 2009, the G20 looked united and strong. The leaders agreed on a shared approach to managing the crisis. They were in favour of economic stimulus packages to balance the fall in demand that the crisis caused. Moreover, they promised to refrain from protectionism.

Difficulties arose later. At the summits in Pittsburgh in September 2009 and Toronto in June 2010, it became obvious that the views of the G20 were diverging. Several factors made it hard to agree on joint positions. They included the varying degrees to which the G20 countries were affected by the crisis, the different speeds of economic recovery and diverging economic models and doctrines. As a consequence, there was no consensus on financial-market regulations or budgetary and monetary policy. Accordingly, the G20’s communiqués only reflected the lowest common denominator. Today, there is open dissent between countries with trade surpluses and those with trade deficits on how to deal with global imbalances.

Ongoing disputes

In Seoul, the USA led the trade-deficit countries in placing demands on trade-surplus countries, calling on them to stimulate domestic demand. The governments thus addressed, however, were prepared to discuss the issue only to a limited extent, and they refused to accept any binding commitments like the one Tim Geithner, the US secretary of the treasury, had proposed to cap trade-balance surpluses and deficits.

This issue was not resolved in Seoul. Instead, the G20 commissioned the IMF to address it. A similar way to handle a lingering dispute had already been chosen at an earlier summit, when the Financial Stability Board based at the Bank for International Settlements (BIS) in Basel was asked to make recommendations on how to regulate banks.

In Seoul, there was also a controversy over exchange rates. The USA and other countries have been trying to persuade China for years to revalue its currency and to no longer peg it artificially to the dollar. The conflict intensified when the Federal Reserve, the central bank of the USA, announced further expansive monetary policy (“quantitative easing II”) to prevent deflation shortly before the Seoul summit. At the summit, this step triggered accusations of the USA manipulatively weakening the dollar’s exchange rate.

This conflict also remained unresolved. Though the participants pledged not to resort to competitive currency devaluations and to adopt a more market-driven exchange-rate system in the Seoul Action Plan, the summit did not bring about any real rapprochement between the various parties.

Exaggerated expectations

The G20 outcomes on global imbalances and exchange rates certainly are less than perfect. It would be unrealistic, however, to expect fast and amicable solutions to such complex problems. China and the USA have been at odds over exchange rates and trade imbalances for a decade. Why should either suddenly change stance? Financial-market regulation, moreover, is an issue that affects national interests since the banks and financial centres of the G20 members compete with one another. Once again, it would be unrealistic to expect governments to make major sacrifices.

Nonetheless, it makes sense for the G20 to discuss these issues. Debate serves to clarify differences. The practice of delegating difficult issues to organisations such as the BIS or the IMF also makes sense since doing so can contribute to reaching viable solutions. For instance, at the Seoul summit, the G20 members endorsed the recommendations by the Basel Committee on Banking Supervision regarding rules on financial institutions’ equity capital.

The greatest challenge for the G20, however, is to make sure that promising declarations of intent are followed up by tangible action. The G20 must avoid being thwarted by national egotism and short-sighted rivalry.