The Bruegel G20 Monitor
The clock is ticking for the G20. Not a new actor on the international stage – it met for the first time in 1998, after the Asian and Russian defaults – the G20 has dramatically raised its profile recently, as a consequence of the financial crisis and the international recession. In its new format, the G20 summit of heads of state and government, it has taken the lead in coordinating the international response to the crisis, covering both macroeconomic policies and financial regulation, connecting inputs from the IMF and the Financial Stability Board. This enhanced role has generated expectations that must now be met, or its credibility – its existence perhaps – will be imperilled. As the global economy emerges from the deepest post-war recession with a reform agenda still largely undefined, the next few months will be crucial.
Success will not necessarily mean breaking through on all fronts or resolving all dissents; this would be unrealistic. What the G20 needs to do is to demonstrate its ability to bring home a few key changes in the rules governing the international economy and financial system, based on a shared diagnosis of the status quo. Not a small task, admittedly, but in a highly interconnected and multipolar world economy only a formation with the global reach of the G20 can perform this role. While the stakes are global, they are of special relevance for Europe. The turmoil has demonstrated the stabilising influence that certain landmark European achievements, like the euro and the ECB, can have in times of instability.
But it has also exposed fragilities in the European single market and more generally in the EU financial and institutional architecture. The crisis can help Europeans tackle important unresolved hurdles. An active presence in the G20 process can and should be part of a strategy to improve the European construction as well.
At this defining moment for global cooperation, Bruegel has decided to open a new forum of discussion specifically dedicated to the G20. The G20 Monitor (G20M) will host comments by scholars affiliated with Bruegel but will also be open to external contributors. It will accompany the institutional calendar by timing its contributions around the main G20 events, such as summits and ministerial meetings. The most proximate of such events is the meeting of G20 finance ministers and central bank governors scheduled for next Friday in Washington DC. Two issues top the agenda, not only of this meeting but of the whole joint Korean-Canadian G20 presidency. The first is macroeconomic policy coordination. At their September 2009 meeting in Pittsburgh, G20 leaders decided to launch a “Framework for Strong, Sustainable and Balanced Growth”, a program of regular consultations and peer reviews aimed at making national macroeconomic policies consistent with balanced growth. In the leaders’ intentions, the consultations will establish, with technical support from the IMF, “commonly agreed policies and objectives” capable of reducing the large and persistent external imbalances among the main economies and currency areas, notably the US and the emerging Asian bloc. Discussions have continued after Pittsburgh, so far without appreciable changes in the negotiating positions.
In the meantime, new data and analyses (most recently by the ECB) have made increasingly clear that the narrowing of payment gaps observed during the recession is cyclical in nature; global imbalances will expand again once global growth resumes its pace. These developments strengthen the conviction that policy action is necessary, but also open a number of questions. What are the chances that a consensus on common rules can be found, now that the sense of urgency and pressure to act stemming from the crisis is fading? Will the new framework pass its first test, that of engineering a coordinated exit from the current
extraordinarily accommodative policy stance? Will the rules and enforcement mechanisms in the different areas (fiscal, structural, etc.), be compatible with national objectives and legislatures? What statistical indicators should the coordination exercise be based on?
The second issue likely to feature prominently in the upcoming meetings, especially later this year, is financial reform. At their London and Pittsburgh meetings in 2009, G20 leaders delegated work in this area largely to the Financial Stability Board (FSB), the IMF and the Basel Committee on Bank Supervision (BCBS). Since then, national reform agendas have moved ahead: new structures for conducting systemic supervision are being set up in Europe, the US, and the UK. More technical discussions, on bank capital and other prudential requirements, pro-cyclicality, management incentives and internal controls, credit ratings,
OTC derivatives markets, as well as reform of the international financial institutions, are ongoing in the FSB, the BCBS and the IMF; their results will come together later this year or shortly after. In this complex program of work, the challenge of the G20 is to coordinate national and international agendas, promoting consistency and speed and ensuring that no important aspects are missed.
Importantly, the G20 is also the place where effective coordination among the new systemic supervisors should be ensured; this is an essential element still missing from the picture. As demonstrated by recent IMF analyses, a national or regional focus in setting capital and other prudential charges for systemically relevant institutions would produce biased results for the system as a whole. Systemic financial risk is inherently a global phenomenon, and so should the related policies be conducted.
As in earlier years, the upcoming G20 agenda also includes other items, in addition to those directly related to post-crisis reform: climate change financing, energy policies, development goals, to name a few. While each of them is valuable in itself and progress would be desirable, the focus on post-crisis reform should not be lost. In no way should advancement in these more peripheral areas be seen as a substitute for lack of progress on the core tasks. The G20 was brought in, at the peak of the turmoil, to provide a global policy response to the crisis and its consequences. It has unique characteristics to do so. Starting this Friday, ministers and leaders will have an opportunity to tilt the balance of the costs and benefits from the most dramatic post-war crisis more to the good side. It should not be missed.