Priorities the G20 should adopt when it convenes for its crucial London gathering to navigate a path out of the global economic crisis
THERE are high expectations for the G20 global economic summit next month. Judging by comments from European leaders, the agenda will include clamping down on tax havens, regulating hedge funds and cutting bankers’ bonuses. Most commentators agree that these questions are not the most pressing for restoring financial stability and economic growth. So world leaders must focus on two things: how best to work together to prevent an even deeper global recession and how to avoid future crises of such magnitude.
The first issue is as pressing as it is divisive. While the Americans are pushing for more fiscal spending, the Europeans are reticent and most emerging powers are keeping quiet. Many countries are loath to commit to more spending before they know whether and how their existing emergency packages are working.
The second part of the agenda is longer term and fiendishly complicated. No one should expect an unwieldy group of 25 or so heads of state (G20 has become a misnomer) to discuss the minutiae of capital adequacy ratios or cross-border supervision. The G20 is a process, not an event, and this summit is a political exercise, not a technical one. What the April meeting is really about is maintaining faith in multilateral solutions at a time when the temptation for go-it-alone and beggar-thy-neighbour policies is growing. If leaning on Liechtenstein or forcing disclosure onto hedge funds helps this cause, so be it. However, in terms of confidence-building, the role of the International Monetary Fund and governments’ commitment to avoid protectionism are crucial.
Since September 2008, the IMF has lent more than $50 billion. It urgently needs more cash. The United States and the European Union support a doubling of the IMF’s resources to $500 billion. They appear less willing to redress their own over-representation in international financial institutions. This would be a precondition for China to contribute significantly to an increase in IMF resources and accept its legitimacy.
The IMF needs enhanced legitimacy to fulfil other essential functions for future financial stability. The world needs better surveillance of national macro-economic and exchange rate policies to address the kind of global imbalances that have contributed to the current crisis. The IMF already has such mechanisms in place. but they need to be strengthened. And the IMF needs to expand its new, $100 billion short-term, conditionality-lite lending facility for emerging markets that are well run. It could also encourage countries to pool their foreign exchange reserves to make them available for emergency lending.
Without easily available emergency finance, emerging markets will conclude that the best insurance against future pain is to accumulate more reserves. They will keep their currencies down and run big external surpluses. This would fuel a protectionist backlash in the West. That is why the summit needs to produce a commitment to increasing the IMF’s role while setting in train a thorough reform of its governance.
There are already signs that protectionism is on the increase. World Bank economists have counted 47 new trade restrictions since late 2008. More than a third have been put in place by the G20 countries that pledged to avoid them at their November 2008 summit. The big risks are industrial subsidies, requests that banks lend to only local companies or the use of environmental arguments to discriminate against foreign goods and services. So G20 leaders need to broaden the “no protectionism” pledge to cover non-tariff measures. And they need to task international organisations with alerting us to national measures that could be harmful for that country’s trading partners.
Katinka Barysch is deputy director of the Centre for European Reform
