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The G7 is dead, long live the G7

The summit in Charlevoix left behind a Group of Seven in complete disarray. The authors think that the G-group, in its current formulation, no longer

Publishing date
13 June 2018

The summit on June 8th and 9th in Charlevoix, Canada, left behind a Group of Seven (G7) in complete disarray. Following days of tense negotiations, the G7 painstakingly managed to hammer out a joint communique, only to see US president Donald Trump withdraw from it shortly after the summit.

Commentators around the world have been quick to blame President Trump for undermining the world order or pushing the G7 into increasing irrelevance. However, in this latest fiasco, we see a mere vindication of our long-held view that the G-group, in its current formulation, no longer has a reason to exist, and it should be replaced with a more representative group of countries (O’Neill and Terzi, 2014a).

The G7 was, for many years, an effective forum for dealing with major pending issues, having first met in 1976. Canada and Italy joined the original G5 (US, Japan, France, West Germany and the UK), who had previously come together earlier in the decade to deal with global economic emergencies such as the collapse of the Bretton Woods agreement and the 1973 oil crisis.

At the time, the G7 countries represented roughly 50% of global GDP (see Figure 1). However, as time went by, this share has been on a constant downward trend, especially due to the rise of China. Today, the G7 countries represent around 30% of global GDP, and IMF forecasts suggest this number will further contract going forward.

Figure 1. GDP commanded by current G7 countries, and revised G7+

gdp-ppp-alessio

Notes: 1992 time series break due to the inclusion of former USSR countries in the database
Sources: own calculations based on IMF WEO

As a consequence of this tectonic shift, it should come as no surprise that in 2008, when a global fiscal stimulus was needed to counteract the Great Recession, the matter could not be dealt with within this setting, and the G20 (as we know it today) was first established. While successful at the time, the G20 has since then lost decisional momentum (Angeloni and Pisani-Ferry, 2012).

Against this backdrop, in 2014 we ran a survey of G20 Sherpas (the high-level advisors of heads of state or government) to understand their perception of the G20’s workings and the potential for global governance reforms.

Faced with a G7 that was not representative of the new world order, and a G20 that was too big and heterogeneous to make decisions when not mired in deep crisis, we proposed the creation of what we then called a G7+ that would replace the current G7 (O’Neill and Terzi, 2014b). In the new G7+, France, Germany and Italy would be replaced by a common euro-zone representative. This would make space for China and India. Canada would be replaced by Brazil. The rest would remain unchanged (Table 1).

As described in Figure 1, this group would be much more representative in GDP terms. As a matter of fact, it would have represented largely a constant share of world GDP since the 1980s, hovering just over 60%. This also remains true looking ahead, based on IMF forecasts. Crucially, and in contrast to the G20, the G7+ would achieve this result without adding seats around the table and complicating decision-making. Also, in population terms, the new G7+ would be much more representative than the current G7, whose countries cover just over 10% of global population (Figure 2).

Crucially, the G7+ would provide leadership and fast-paced decision-making on economic and financial issues of global relevance – but should not replace the G20, which remains an important avenue for discussions of all other issues that call for higher representativeness, ranging from terrorism and food security to tax avoidance and climate change.

Figure 2. Population represented by current G7 countries, and revised G7+

POP-alessio

Sources: own calculations based on IMF WEO

At the time of our first proposal, G20 Sherpas from non-G7 countries saw the move as reasonable, but argued that this was feasible only if the West were to move first. On the other hand, G7 country representatives made the point that even if representativeness is low, it remains desirable to have a forum for like-minded democracies. While this argument already appeared weak at the time, the latest developments make this view even more untenable.

Regarding the euro-area countries, we made the point at the time that giving up their seat and having a joint representative would send a clear signal in terms of commitment to the common currency. In light of Italy’s recent financial storm, this seems even more pressing nowadays than it was back then. Moreover, these countries already have a common trade and monetary policy, and soon potentially a joint defence force. It was indicative that when the new Italian prime minister Giuseppe Conte mentioned at Charlevoix that economic sanctions on Russia should be relaxed, German Chancellor Merkel’s reply was that they should have spoken about that earlier (in a European setting).

President Trump might well have scrambled decades of world order for the wrong reasons through his “America First” agenda. However, the world has been changing fast and the G7, as it stands today, looks like a relic of the past. The earlier western countries realise this, the faster the world will achieve a better, more efficient, more representative global governance.

 

Bibliography

Angeloni, I. and Pisani-Ferry, J. (2012), “The G20: Characters in search of an author”, Bruegel Working Paper, 2012/04.

O’Neill, J. and Terzi, A. (2014a), “Changing trade patterns, unchanging European and global governance”, Bruegel Working Paper, 2014/02.

O’Neill, J. and Terzi, A. (2014b), “The twenty-first century needs a better G20 and a new G7+”, Bruegel Policy Contribution, 2014/13.

About the authors

  • Jim O‘Neill

    After being on its board since inception, Jim became a Visiting Research Fellow to Bruegel in September 2013. He planned  to conduct research on aspects of changing global trade, global governance, and measuring better and targeting higher sustainable economic growth.

    Jim worked for Goldman Sachs (GS) from 1995 until April 2013. He joined Goldman in 1995 as a partner, Chief Currency Economist and co-head of Global Economics Research. From 2001 through 2010, he was Chief Economist and head of Economics, Commodities and Strategy Research (ECS). In September 2010, he became Chairman of Goldman Sachs Asset Management (GSAM).

    Prior to joining GS, Jim was head of research, globally, for Swiss Bank Corporation (SBC) from 1991 to 1995. He joined SBC in 1988. Prior to that, he worked for Bank of America and International Treasury Management, a division of Marine Midland Bank.

    Jim is the creator of the acronym BRICs. He has published much research about BRICs (which has become synonymous with the emergence of Brazil, Russia, India and China) and the broader emerging markets, as the growth opportunities of the future. This autumn, Jim is making a series for BBC Radio 4 about Mexico, Indonesia, Nigeria and Turkey, due to be aired in January 2014.

    Jim is on the board of a number of research organisations including, Itinera, the UK-India Round Table and the UKIBC. He is also Chairman of the Greater Manchester Local Enterprise Partnership Advisory Board.

    He is one of the founding trustees of the UK educational charity, SHINE. Jim also serves on the board of ‘Teach for All’ and a number of other charities specialising in education and in September 2013 he became a Non-Executive Director of the UK Government’s Department of Education.

    Previously, Jim served as a Non-Executive Director of Manchester United before it returned to private ownership in 2005.

    In 1978, Jim earned a degree in economics from Sheffield University and in 1982 a PhD from the University of Surrey. He received an Honorary Doctorate from the Institute of Education, University of London, in 2009 for his educational philanthropy.

  • Alessio Terzi

    Alessio Terzi, an Italian citizen, joined Bruegel in October 2013. Prior to this, Alessio was a Research Analyst in the EMU governance division of the European Central Bank. He has also worked for the macroeconomic forecasting unit of DG ECFIN (European Commission), the Scottish Parliament’s Financial Scrutiny Unit, and BMI Research (Fitch group), a country risk and forecasting firm in the City of London, where he was a Europe Analyst.

    He holds a Bachelor's degree in International Economics from Bocconi University and an MPA in European Economic Policy from the London School of Economics, where he specialised in public economics. During his studies, he spent a semester at Dartmouth College (USA). Alessio’s main research interests include structural reforms, competitiveness, EMU governance, and the G20.

    Between 2016-2018, Alessio was a Visiting Fulbright Fellow at the Kennedy School of Government of Harvard University. He completed a PhD in Political Economy at the Hertie School of Governance in Berlin, with a thesis on economic growth, written under the supervision of prof. Henrik Enderlein, Dani Rodrik, and Jean Pisani-Ferry.

    He is fluent in Italian and English, has a good knowledge of French, and an intermediate level of German and Spanish.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

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