In a defining year for its credibility as a cooperation forum (for reasons, see my previous Editorial), the G20 is now approaching a critical juncture. The two meetings scheduled for June (a finance ministers and central bank governors meeting in Busan, Korea, on 4-5 June, in preparation for a leaders’ summit on 23-24 June in Toronto, Canada) are not the last planned for this year, but will unquestionably set the tone going forward and signal what can realistically be achieved in later months. In June we will probably know better how the postcrisis reform program will look like: what can be achieved and what will remain in the book of intentions. We will also begin to understand if the decision taken by leaders in October 2008 to put the G20 at the helm of global economic cooperation, replacing the G7 and making all international organisations de-facto report to it, will result in more effective governance as intended and needed or merely add another layer of inconclusive international meetings.
In the meantime, the crisis has shifted course and the nature of global risks has changed. From the outset, theory and intuition suggested that a crisis that had started in the financial sector, and then expanded into the real economy, would eventually turn into a fiscal crisis.
The data of Reinhart and Rogoff show that this intuition fits the historical record. What didn’t seem obvious until recently was that this time the secular regularities would unfold so quickly for some highly exposed sovereign debtors, and that this would result in a return of clear and present danger in the international financial system reminiscent of late 2008.
Greece and some other EU country fit the main R&R requirement, that of high external sovereign indebtedness, rather well; at least if one interprets “external” in the sense of their debt being held largely by foreign investors and denominated in a currency that cannot be used by individual nations to inflate their problem away.
This turn of events is relevant for the G20, for several reasons. First, it is likely to affect the development and the implications of global payment imbalances, an issue high in the G20 priority list for which a new coordination framework (the “Framework for Strong, Sustainable and Balanced Growth”) is being set up. Secondly, the approach chosen to deal
with the EU debt problem, that of close cooperation between the IMF and the regional authorities, creates a precedent and perhaps a model for the future. This is an element that could feature in a future reformed “global safety net”; another focus of the G20 agenda to which I return below. More generally, the recent crisis of Greece and its global repercussions
have highlighted, in new and important ways, the interdependence of the international financial system and the pressing need of global responses to global problems, the very vacuum that the G20 was created to fill. Having said all this, understanding how the G20 should approach the problem in the upcoming meetings, fitting it into its already dense agenda without overburdening it, is far from evident.
First and foremost, ministers and leaders in their June meetings will need to make appreciable progress in the area of macroeconomic policy coordination, fulfilling the mandate assigned by the leaders in the Pittsburgh summit last year. As noted by Jean Pisani Ferry and André Sapir in a recent contribution to this blog, progress has been disappointing recently. The mark of success here should be threefold. First, the “Framework” should result in macro-policies by each major participating country or area that are different from those one would expect based on pure national interests or stated intentions. We should, in other words, move beyond the “multilateral consultations” counducted by the IMF in 2006. Second, the macroeconomic scenarios designed by the IMF should convincingly show that global imbalances remain safely under control (possibly, decline) in the medium term. Third, the coordination exercise should give indications on the exit strategy from the present state of extraordinary fiscal accommodation. This is an area where the Europeans, that have already extensively discussed modalities and timing of exit for most EU members in the context of their excessive deficit procedures, could make a significant contribution. It is, finally, also important how the “Framework” and its results be effectively communicated to the public. Transparency – on modalities, models, assumptions, possible areas of uncertainty and disagreement – would contribute to success.
On the second main agenda point, financial reform, one should probably not expect a substantive outcome in June but only later this year. The Financial Stability Board and the Basel Committee on Bank Supervision will deliver their input at a later stage. In June it will be essential that ministers and leaders maintain their commitment and step up pressure on the technical bodies – the IMF, plus the two already mentioned – to deliver. G20 ministers and leaders can also contribute by ensuring that the new structures created at the national and regional levels cooperate fully and effectively. Cooperation will be particularly important between the systemic supervisors being created on the two sides of the Atlantic – the Financial Stability Oversight Council in the US and the European Systemic Risk Board in the EU.
Finally, the Korean presidency has indicated (see President Lee Myung-bak’s January Davos address) its interest in proposing a new “Global Financial Safety Net” as one of the main outcomes of the November summit in Seoul. Originally conceived as a tool for mitigating sudden reversals of capital flows to emerging and developing countries, thereby limiting their need to accumulate foreign exchange reserves, the idea of “Safety Net” seems increasingly relevant also in relation to fiscal vulnerability risks. Such risks evidently are not limited to emerging and developing countries. The main objection raised against a “Safety Net”, moral hazard, applies here as well. Strengthening international surveillance, notably through the “Framework for Strong, Sustainable and Balanced Growth”, could provide part of the answer.