May 3, 2009
The following will shortly be published in the College of Europe’s new e-journal, EU-China Observer:
Now that the dust has settled, the results of the much heralded G20 summit in London on 2 April can be reviewed.
There is consensus that there are grave, linked economic and financial crises. There is no consensus on their causes nor on their breadth or depth. And if there is no agreement on the problem, it is not surprising that there is a diversity of views as to solutions.
There are differences in overall approach, ranging from the US throwing large sums of money at the problems which it hopes will stimulate the economy; to the cautious approach of Germany, not increasing the stimulus package until it sees whether the earlier package is working. Developed and developing countries obviously have different priorities, which makes it significant that they could all agree the final communiqué.
The most important result of the summit that there was eventual agreement. Failure would have led to more loss of confidence, a vital factor in ending the crises. Indeed, the symbolism of the occasion may well have been more important than the substance.
The meeting did not result in any fundamental changes, but the financial and stock markets rallied and some of the gloom has dissipated. Fears of a financial collapse in a euro member country (in particular, Greece and Ireland) or the falling apart of the euro zone itself have almost disappeared. The decision to increase the capital of the International Monetary Fund (IMF) by $500 billion has given hope to a number of countries in Central Europe and elsewhere. Finally, the action being taken by the US to assist their banks in disposing of their toxic assets and obtaining unlimited liquidity from the Federal Reserve, has calmed down the financial markets.
Most importantly, there has not been any serious social and political unrest. Industrialised countries have increased the collaboration between their social partners. However, unemployment continues to rise. China and some other developing countries will increase their GDP in 2009, but most developed and developing countries will register declines.
Critically important financial reforms have not yet been put into place. The G20 has so far only managed to identify the issues.
London effectively marked the end of the G8 and the beginning of a new era in country relationships, with the G20 coming into its own. Brazil, China and India at last have seats at the top table.
Any impact of the London Summit on the global economy in the short term is unlikely. No major improvement is foreseen before the G20 meeting (technically an expanded G8 summit) to be held in Italy in mid-July. When eventually the recovery takes place, it will not be possible to assign the progress to a single meeting or policy.
Winners & losers
China came out of the summit well, as symbolised by President Hu Jintao standing in the official photograph immediately to the right of the host, Gordon Brown. It has risen in influence: without China little can be achieved. Beijing has changed from a passive observer to an active global power. The country is seen as a key player, having regard to its size and rising share in the global economy, and three decades of economic reform. It will contribute $40 billion towards the IMF’s capital increase and rightly seeks an increased share of voting rights.
The extent to which China will be able to drive the financial markets in the future depends on how profound the affect of the crises and how it copes with it.
The proposal by Governor Zhou of the People Bank of China to switch the basis of the international monetary system based on the U.S. dollar to one based on SDRs (special drawing rights) was very interesting.
Russia, on the other hand, loses its privileged position as the only ‘unqualified’ member of the G8. Its influence is likely to be far less in the G20. The country also suffers from a failure to diversify from the energy field, inefficient financial institutions and a corrupt judicial system.
The European Union achieved in London agreement on strengthening the international financial institutions and the governing regulations
However, it will lose some influence in the IMF because of the increased participation of China. Unless the EU gets its own act together, speaks with a single voice, shows solidarity between old and new Member States and avoids protectionism, it will continue to lose influence.
The US has lost some influence as the crises began there, but President Obama played a highly responsible role in London and did not browbeat the Europeans on the size of their incentive packages and their refusal to increase IMF’s resources by the amount Washington wanted.
The final communiqué combines the European, American and Asian voices. The European influence is to be seen in the decision to establish the new Financial Stability Board to ensure that the problem of inadequate regulation and supervision of the financial sector is resolved. The US was behind the emphasis on together restoring global growth. The decision to expedite the giving to developing countries more voting power in the IMF at the same time as tripling IMF resources was very much due to the Asian voice. Above all, the mix of voices reflected in the London Summit communiqué represents substantial progress compared to the pre-crisis pattern where the voices of the G-7 countries, or more narrowly the United States and Europe, crowded out others.
Hope springs eternal
President Obama US President and the Federal Reserve’s chairman, Ben Bernanke have both recently stated that they saw signs of progress towards economic revival in the US. Whether or not this is solely ‘coordinated optimism’ cannot be judged, although it would be surprising if Obama unnecessarily put in question his credibility. On the other hand, hope and confidence are badly needed and are, in themselves, driving forces.
Very recent data from China indicate that heavy government spending has already improved the economy. GDP growth of ‘only’ 6.1% was recorded in the first quarter of 2009. The worst period appears to be at an end, but this cannot be assured yet.
To what extent is there greater cooperation between the EU and China in facing the economic and financial problems? What will the effect of the current crisis be on EU-China relations?
The subject will clearly be on the agenda of the High Level Economic & Trade Dialogue in Brussels on ?-? May and the EU-China summit on ?? May in Prague. However, neither meeting involves the Member States as a group and none of the big Member States will be present. This weakens the prospect of strong cooperation in the light of the failure of the EU27 to speak with one voice, and the competition between, in particular France, Germany and the UK for closer bilateral relations with China.
The notion of a G2 (US and China) exists but not a G3 (plus EU). However, suggestions that a “Chimerican” G2 “running the world” is over the top. EU’s voice cannot be ignored: it is China’s largest trading partner with bilateral trade worth a €300 billion. And, in any case, China is more likely to keep its options open.
This having been said, the American voice is much stronger and Beijing is likely to work more closely with Washington than Brussels. This is evidenced by the Obama-Hu summit, which was the most important among all the bilateral meetings at the G20 in London.
The former Strategic Dialogue and biennial Strategic Economic Dialogue will be upgraded. US Secretary of State Hillary Clinton and Chinese State Councilor Dai Bingguo will chair the “Strategic Track” and U.S. Secretary of the Treasury Timothy Geithner and Chinese Vice Premier Wang Qishan will chair the “Economic Track” of the dialogue.
The first of the new dialogues will take place Washington this summer. President Obama will visit China later this year. The US-China relationship is becoming the most important bilateral relationship in the world.
It will be interesting to compare the outcome of the next US-China Strategic Economic Dialogue with that of the next EU-China High Level Economic & Trade Dialogue.
G20 London communiqué
The Global Plan for Recovery and Reform begins with a pledge to do whatever is necessary to:
· restore confidence, growth, and jobs;
· repair the financial system to restore lending;
· strengthen financial regulation to rebuild trust;
· fund and reform our international financial institutions to overcome this crisis and prevent future ones;
· promote global trade and investment and reject protectionism, to underpin prosperity; and
· build an inclusive, green, and sustainable recovery.
The more important of the provisions of the plan are set out below:
· IMF resources will be tripled to $750 billion, a new SDR allocation of $250 billion to be supported together with at least $100 billion of additional lending by the multilateral development banks (MDBs), $250 billion of support for trade finance to be ensured, and the additional resources from agreed IMF gold sales to be used for concessional finance of the poorest countries.
· An unprecedented and concerted fiscal expansion, amounting to $5 trillion by the end of 2009, will save or create millions of jobs. A commitment was made to deliver the scale of sustained fiscal effort necessary to restore growth.
· G20 central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.
· Actions to restore growth cannot be effective until domestic lending and international capital flows are restored.
· The G20 member countries are confident that the agreed actions, and their unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to growth.
· They are resolved to ensure long-term fiscal sustainability and price stability and to put in place credible exit strategies from the measures that need to be taken now to support the financial sector and restore global demand.
· All economic policies will be conducted cooperatively and responsibly with regard to the impact on other countries, and the competitive devaluation of currencies will be eschewed.
· Action will be taken to build a stronger, more globally consistent, supervisory and regulatory framework for the financial sector.
· There was agreement to ensure that domestic regulatory systems are strong and, at the same time, much greater consistency and systematic cooperation between countries will be maintained.
· Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.
· To this end the agreed Action Plan will be implemented as set out in the progress report attached to the communiqué. A Declaration, Strengthening the Financial System, has also been issued. In particular it was agreed:
· that a new Financial Stability Board (FSB), with a strengthened mandate, will be established as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
· that the FSF should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
· to reshape the regulatory systems so that national authorities are able to identify and take account of macro-prudential risks;
· to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
· to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
· to take action against non-cooperative jurisdictions, including tax havens;
· to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning, and to achieve a single set of high-quality global accounting standards; and
· to extend regulatory oversight and registration to credit rating agencies to ensure that they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.
· Emerging markets and developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn in the global economy. It is imperative for global confidence and economic recovery that capital continues to flow to them. This will require a substantial strengthening of the international financial institutions, particularly the IMF. Therefore an additional $850 billion of resources through the global financial institutions will be made available to support growth in emerging market and developing countries.
· The financial institutions must be strengthened in order to ensure their longer term relevance, effectiveness and legitimacy.
· Falling world trade demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. To this end, the commitment made in Washington to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports, was reaffirmed.
· The human dimension to the crisis was recognized. A commitment was made to support those affected by the crisis by creating employment opportunities and through income support measures.
· Determination was expressed not only to restore growth but to lay the foundation for a fair and sustainable world economy. The current crisis has a disproportionate impact on the vulnerable in the poorest countries, and collective responsibility was recognized to mitigate the social impact of the crisis and long-lasting damage to global potential.
· It was agreed to make the best possible use of investment funded by fiscal stimulus programmes towards the goal of building a resilient, sustainable, and green recovery.
· The commitment to address the threat of irreversible climate change, based on the principle of common but differentiated responsibilities, was reaffirmed.
· A meeting will take place before the end of 2008 to review progress on the commitments.
Author : Stanley Crossick