Opinion

From G7 to G20: passing three hot potatoes

Yesterday’s G7 video-conference ended in silence. It wasn’t even possible for the group to issue a joint statement after the US administration's push to enter into a blame game over the Covid-19 label. However, let’s not give up. There is one more chance today for global coordination: the G20 emergency video-conference hosted by Saudi Arabia. This is the opportunity for the G20 to stand out and overshadow the G7 and for the world to end up with some international policy coordination. The key issues continue to be dollar liquidity, excessive dollar appreciation and plummeting oil prices.

By: Date: March 26, 2020 Topic: Global Economics & Governance

What a difficult world to live in, especially for those who believe in international cooperation. In the light of a pandemic, each nation affected takes its own measures without bothering to look at its neighbors. What a remembrance of what brought economies further down during the Great Depression.

In fact, yesterday, the G7 video-conference ended in silence (maybe in tears for those most affected, namely the European nations). It wasn’t even possible for the group to issue a joint statement after the US administration’s push to enter into a blame game over the Covid-19 label. However, let’s not give up. There is one more chance today for global coordination: the G20 emergency video-conference hosted by Saudi Arabia.

The good thing about today’s call, is that with China’s presence, it will be hard for the US (which holds the G7 presidency at the moment) to push others to discuss the labeling of the problem (the origin of the pandemic) rather than the solutions.  As a quick reminder for G20 members, here is a list of issues that would be worth discussing.

First, there is no doubt that a dollar liquidity crunch is one of the key ghosts haunting G20 cooperation.  While the Fed has already extended swap lines to nine more central banks, few of them are emerging economies (Mexico and Brazil only) and many more are waiting for news from the Fed. If the Fed feels uncomfortable with becoming the global provider of ultimate dollar liquidity, the IMF is clearly the second line of defense. Yet with over 80 countries having already knocked on the IMF’s door for emergency liquidity assistance, it seems obvious that its resources alone will not be enough to protect emerging and frontier economies from the hard currency liquidity shortages stemming from the coronavirus pandemic. The G20 would be well advised to discuss how to provide more resources to the IMF in a timely manner, even more so if the Fed is not ready to extend additional swap lines.

Second, and beyond USD liquidity, the strength of the dollar is, no doubt, an important topic for the G20. The G7 could have offered a more appropriate venue, as host to the most liquid currencies in the world, but the first mover advantage has been lost. This is why it is quite likely that G20 members will end up warning the G7 about the importance of avoiding excessive volatility in forex markets globally. One could argue that emerging economies may have been benefiting from weaker currency as a buffer to the slump in their economies due to the spread of the pandemic, but the reality is that currencies that are too weak are also risky, as it leaves room for investors to start doubting these countries’ ability to repay their dollar debt and, thus, push up the cost of funding. In other words, too strong a dollar is bad news for emerging economies as well, so the united front for coordinated forex intervention at the G7 level may be achieved at the G20.

Finally, commodity – and especially oil price – weakness will surely be discussed at a meeting in which major commodity producers sit at the table. It seems clear that the host –Saudi Arabia – will be kindly asked to contribute its fair share to avoid an additional collapse of oil prices from historically low levels. At this juncture, even major importers like India or China might tend to agree that too low commodity prices may generate more problems than benefits. In fact, the collapse of a major energy company, for example, let alone the default of an oil or gas exporter, could send shockwaves through the global economy, decimating the benefits of cheaper oil imports.

All in all, the hot potato that the G7 has passed to the G20 should be grasped with courage as the world has never been in more need of coordination for a problem that is, by definition, global: a pandemic. This is the opportunity for the G20 to stand out and overshadow the G7. This development will be one more important signal of the  increasingly – and inexorably –“West-less” world we are all living in.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article Download PDF
 

Policy Brief

Greening the recovery by greening the fiscal consolidation

In the wake of COVID-19, some economic recovery policies will help green the economy – for example, energy renovation of buildings. But there are limits to the share of stimulus that can be explicitly green. The European Union should therefore also green the fiscal consolidation by setting out the path to much higher carbon prices than today. This would guide investment and provide revenues to help the fiscal consolidation.

By: Ben McWilliams, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, Finance & Financial Regulation Date: July 8, 2020
Read about event More on this topic
 

Past Event

Past Event

An EU budget for Europe's future with Johannes Hahn

How do we make the EU fit for future?

Speakers: Zsolt Darvas, Johannes Hahn and Mehreen Khan Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 7, 2020
Read article More on this topic
 

Opinion

Credible emerging market central banks could embrace quantitative easing to fight COVID-19

Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation.

By: Gianluca Benigno, Jon Hartley, Alicia García-Herrero, Alessandro Rebucci and Elina Ribakova Topic: Global Economics & Governance Date: July 6, 2020
Read article More on this topic
 

Blog Post

EU recovery plans should fund the COVID-19 battles to come; not be used to nurse old wounds

In its proposed Recovery Fund, the European Commission uses allocation criteria mainly linked to infection rates and past economic performance. To foster an efficient economic rebound post COVID-19 crisis, we propose instead to allocate funds through a forward-looking approach based on specific industrial and economic structure of EU regions.

By: Carlo Altomonte, Andrea Coali and Gianmarco Ottaviano Topic: European Macroeconomics & Governance Date: July 6, 2020
Read article Download PDF More on this topic
 

Policy Contribution

The financial fragility of European households in the time of COVID-19

The concept of household financial fragility emerged in the United States after the 2007-2008 financial crisis. It grew out of the need to understand whether households’ lack of capacity to face shocks could itself become a source of financial instability.

By: Maria Demertzis, Marta Domínguez-Jiménez and Annamaria Lusardi Topic: European Macroeconomics & Governance Date: July 2, 2020
Read about event More on this topic
 

Past Event

Past Event

Impact and additionality assessment in the time of COVID-19

Understanding the impact and additionality of policy interventions.

Speakers: Ugo Albertazzi, Benoit Campagne, Andrea Conte, Zsolt Darvas, Maria Demertzis, Francesco Di Comite, John Earle, Matteo Falagiarda, Áron Gereben, Helmut Kraemer-Eis, Hans Peter Lankes, Iana Liadze, Andrew McDowell, Nicola Pochettino, Debora Revoltella, Mattia Romani, Simone Signore, Natacha Valla, Georg Weiers and Marcin Wolski Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 30, 2020
Read about event More on this topic
 

Past Event

Past Event

The need for market-based finance after COVID-19

How do COVID-19-caused financial dislocations inform policy responses?

Speakers: Maria Demertzis, Gabriel Makhlouf and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 29, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Redefining Europe’s role after the Covid-19 Pandemic

How will the Covid 19 crisis change the role of the EU in Europe and the world?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 25, 2020
Read about event More on this topic
 

Past Event

Past Event

Redefining Europe's role after the COVID-19 pandemic

Amidst COVID-19: how to keep markets integrated when states play a bigger role in the EU and its neighbourhood?

Speakers: Gabriele Bischoff, John Erik Fossum, Kalypso Nicolaïdis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 25, 2020
Read about event More on this topic
 

Past Event

Past Event

COVID-19 in CEE and Europe’s neighbourhood: Do we need a Vienna Initiative 3.0?

How is the Vienna Initiative evolving to respond to the crisis caused by COVID-19?

Speakers: Thomas Wieser, Pierre Heilbronn, Mark Le Gros Allen, Piroska Nagy Mohacsi and Boris Vujčić Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2020
Read article More on this topic More by this author
 

Opinion

A tale of two pandemics

The two narratives briefly examined here cast light on different aspects of the EU in the times of Covid-19. Euroskeptic nationalists typically propagate claims of EU failure but have been rather subdued during the pandemic as mainstream governments have taken over their trademark policy of closing borders to foreigners. Nonetheless, the grip on power of several pro-EU mainstream leaders, including President Emmanuel Macron in France, Prime Minister Conte in Italy and Prime Minister Pedro Sanchez in Spain, remains tenuous.

By: Michael Leigh Topic: European Macroeconomics & Governance Date: June 23, 2020
Read about event More on this topic
 

Past Event

Past Event

The role of AI in healthcare

How can AI help us fight through a pandemic crisis?

Speakers: Dimitris Bertsimas, Georgios Petropoulos, Effy Vayena and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 23, 2020
Load more posts