A series of summits of governments and international financial institutions took place in April. Much was expected of these. They were seen as the opportunity for global financial leaders to provide authoritative guidance on the global response to the economic havoc wrought by the COVID-19 pandemic.
The G20 meeting of finance ministers and governors of central banks on 15 April stands out. The main announcement from the meeting was a one-year freeze of bilateral government (and private sector on a voluntary basis) loan repayments for low-income countries, for a value “north of $20 billion”. Other important measures were also announced, including the deployment of $200 billion through Multilateral Development Banks (MDBs) and the deployment of the International Monetary Fund’s resources in an accelerated manner. However, the leaders failed to agree on a new allocation of Special Drawing Rights (SDRs) – IMF assets that IMF members can swap for currency – as was pushed for by the European countries and other G20 members, such as China.
Reaction in the press to the announcements was largely negative, driven by the inability of the ministers to mandate a substantial new issue of SDRs. Here, we argue for a more nuanced view. We believe that, in the circumstances, the role of the G20 at this early stage in this crisis has demonstrated the value and centrality of this platform. This is despite more recent news that differences between the US and China have led a planned second G20 Leaders’ virtual meeting to be cancelled.
An assessment requires both a benchmark and an awareness of context. As for the first, many informed observers would cite the G20 Leaders’ summit of April 2009 in London, which responded to the global financial crisis, as the most impressive demonstration of G20 effectiveness and solidarity.
Looking back and comparing the current response with that of 2009, we make three observations:
- First, the amounts of stimulus committed are equivalent in nominal terms, in both cases $5 trillion were committed by the G20 countries (the value of the 2009 package in real terms would now be worth around $6 trillion). Nevertheless, many observers have rightly noted that the announced $5 trillion on 26 March was money previously committed and in some cases spent.
- Second, while in 2009 world leaders used multiple IMF financing tools to support emerging economies (increased SDRs, member financing and NABs (New Agreements to Borrow – extra money the IMF can lend from member states– ), in the current crisis, while funding of these facilities has been assured, they have not been expanded, although access has been enhanced and a new short-term liquidity line has been created. The G20 has instead opted for debt relief for the poorest countries.
- Third, the commitments made by Multilateral Development Banks (MDBs) are greater in this instance, amounting to $200 billion compared to $100 billion in 2009 (equivalent to $120 billion 2020 dollars).
There has been much debate on exactly how the 2009 summit added value and prevented a recession from becoming a depression. In our view the demonstration of solidarity in 2009 reassured markets and provided fiscal space for emerging market economies. Indeed, as noted by Triggs (2018), even in 2009, the G20 was not the driver of extra national spending, but rather a commitment and coordination device, giving governments the credibility both internally and externally to spend more.
The success of London was based on two political realities: first, that the shared banking crisis prompted unity in the G7; second that the large emerging markets were pleased and proud to be recognised as systemically important and to be seated at the top table of global governance. It is also the case that London was a summit of leaders, and that the UK chair was a member of the G7 and had five months to prepare after the first summit in Washington.
The circumstances of the 15 April meetings were very different. First, the awareness of the global economic shock is relatively recent. When the G20 finance ministers met in Riyadh at the end of February, there was only slight reference to the economic impact of the pandemic. Less than a month later, virtual meetings of the same ministers had been convened (on 23 March) and shortly thereafter the G20 leaders also met virtually to provide political cover for their ministers. Second, while individual G7 countries moved very swiftly (and at unimaginable scale) to shore up their own economies, there are divisions between them (essentially the US against Europe) over the core issue of a large additional allocation of SDRs. These divisions within the G7 are echoed by the long-standing economic tensions with China, most manifestly with the US. These tensions are also present to a milder degree between China and key European Union member states, as well as with the EU itself, a member of the G20 in its own right. Finally, all of this has taken place under the presidency of Saudi Arabia, not itself a G7 member, in the unfamiliar environment of virtual meetings, without the all-important opportunity for offline networking that is indispensable for successful economic diplomacy.
All that said, by the time the meeting took place, the enormity of the finance and humanitarian challenge was well known. The finance track rightly gets the most attention because from the start the G20 has declared its core mandate to be strong, sustained and balanced growth. It is accordingly appropriate to judge the 15 April meeting by the boldness and urgency with which the ministers acted on this core mandate. With the advanced economies largely having taken care of themselves, the issue was how to provide support to the emerging and developing economies. Of the two important proposals before them, the G20 ministers succeeded in agreeing on a debt standstill for the least-developed countries, but were unable to come to agreement on SDRs in the face of US opposition.
We consider this outcome as at least a moderate success for two important reasons. First, it has brought China into the arena of coordinated sovereign debt relief (the Paris Club), something it has previously shunned. This is not an outcome that could have been achieved by the G7 on its own. Second, again given the centrality of China but also because of divisions in the G7, this time the eyes of the world were clearly on the G20 meeting, which is also why there is a sense of disappointment over the SDR outcome. In our view, then, in this crisis the G20 has indeed become the premier forum for international economic cooperation, and its guidance has in turn been central to the IMF and the World Bank.
The role of Europe
Given political tensions between the US and China (and milder, though still important, policy disagreements within the G7) it seems that European members of the G20 and G7 played an important role in bridging the divide on the issue of the debt standstill. After a meeting of G7 foreign ministers on March 25, the statement of the French Minister, Jean-Yves Le Drian, clearly mentioned France’s call to the G7 to push for assistance to countries most in need at the G20 discussion table.
Since then, European leaders have become more vocal about their expectations. On 13 April, President Macron openly called for debt relief for African countries. On 14 April, 18 African and European leaders, including those of France, Germany, Italy, The Netherlands, Portugal, Spain and the European institutions, published a letter calling for a moratorium on the public debt of developing countries, but also on the new allocation of SDRs. Thus, the call by the G20 on a debt service standstill on official debt for the least-developed countries should be seen as a partial success for Europe at the G20 and further confirmation of the centrality of the G20 platform at this time.
We have taken a ‘half-full’ view on the value-added by the G20's finance track, both on outcome and on process. On outcome, a debt standstill which includes China is an important advance, although implementation remains to be done. On process, we have seen that the G20 is able to function productively at a time of deep tension between two of its important players, and that, despite the intimacy and cohesiveness between finance officials of the G7, the G20 is again the central forum in a crisis. The disagreement on fresh SDRs, essentially between Europe and the US, is unfortunate and seems as though it will need resolution, if at all, at the political level. Clearly, more should be done, as the IMF estimated the overall financial needs of emerging markets at $2.5 trillion and we are still far from reaching that, with the Fund’s own resources estimated at around $1 trillion. As noted by Stephanie Segal, of the Center for Strategic and International Studies in Washington, this initial agreement is a framework on which more can be built. Finally, the COVID-19 crisis is about much more than the economy, and the G20 operates through many more organs than the finance track. A fuller assessment of the G20’s value and effectiveness will need to encompass all the fronts on which it needs to act.