This week’s G-20 summit in Canada is the first leaders’ meeting since the start of the global economic recovery. While a favorable summit outcome could strengthen market confidence, world leaders continue to face several daunting challenges. In particular, three areas : addressing global imbalances, coordinating financial regulation, and combating protectionism—remain politically thorny.
Global imbalances have exacerbated frailties in financial systems and encouraged trade protectionism in the United States. As part of a concerted effort to contain global imbalances through a peer-review process, the G-20 committed to a U.S.-sponsored “framework for strong, sustainable and balanced growth” at the September 2009 Pittsburgh summit. But with trade, credit, and commodity prices recovering, imbalances are once again widening, with the United States, Britain, Canada, Australia, India, Turkey, France, and the southern European nations expected to run greater trade deficits. The mirroring surplus nations are familiar : China, Japan, emerging East Asia, Germany, and the oil producing nations.
To make matters worse, U.S. debt, ballooning due to increased deficit spending, will require even more foreign borrowing. Emerging Asian economies interpret this as a validation of reserve accumulation. Meanwhile, Europe’s fiscal retrenchment and lackluster growth re-emphasize the United States’ role as the consumer of last resort. China’s pre-summit move to revalue the renminbi is positive but also far too limited, and Beijing will continue to be pressed to build a vibrant services economy and stoke consumer-led growth. The other emerging Asian nations – especially Hong Kong, Malaysia, Singapore and Taiwan, all of whom peg their currencies to the renminbi – have few incentives to revalue their currencies before China and Japan do so.
Washington, therefore, urgently needs a plan for fiscal consolidation, and China and the East Asian nations must commit to a staged currency revaluation and structural reforms so as to end their export-dependence. Europe’s gradual recovery, a major topic for the upcoming summit, should not come undone as a result of austerity measures. In the G-20, continuity is crucial. The leaders need to dedicate time in each summit meeting to address imbalances, single out laggard nations, and continue to measure progress. The G-20 also needs to be able to push for action, calling a special finance ministerial session if necessary.
As for financial regulation, the G-20 has tasked the Financial Stability Board (FSB), a Basel-based forum re-launched by the G-20 and composed of national financial authorities, to propose ways to coordinate regulatory policies. Coordination is necessary for fueling global finance and banking. Progress has been made on the “Basel III” capital requirements, which establish the amount of capital a bank has to carry in its vaults to cushion against emergencies, with agreements expected this year. Transatlantic coordination, however, has been overshadowed by acrimonious disagreements over bank taxes and accounting standards, as well as tighter rules for hedge funds and derivatives.
Paris and Berlin argue for sturdy common rules, while Washington favors approaches that are not as stringent or coordinated. With the toxic assets and banking crisis centered in the transatlantic arena, emerging markets face less political pressure to reform and are also more resistant to blanket prescriptions.
As a result, the momentum for securing common principles for the resuscitation of failing multinational banks is dwindling. The issue is critical : multinational banks hold 75 percent of European continental banking assets, and nearly a quarter of U.S. banking revenue comes from overseas. Absent common guidelines, each country’s regulators will continue to protect domestic depositors and taxpayers in the event of bank failure, thereby only hastening a loss of confidence in the troubled bank.
Yet harmonizing regulatory policies globally is neither feasible nor necessary. Instead, compatible and non-discriminatory rules are needed to avoid protectionism and politically costly arbitration. Effective cross-border bank resolution requires seamless coordination ; mutual recognition represents just the first step. Transatlantic coordination must come first because the region remains the hub of global finance. With Asian nations vying to establish their financial centers, Washington and Brussels share an interest in being the first movers in crafting global principles.
Finally, the specter of protectionism looms large. Fortunately, in contrast to the beggar-thy-neighbor policies of the 1930s, protectionism was subdued during the recent crisis, and world trade is now rebounding impressively. However, high unemployment in the OECD countries will tempt countries to slip back into protectionist positions. The nine-year-old Doha Round, which the G-20 has committed to concluding this year, is being held hostage to disagreements over agriculture, manufacturing, and services trade.
Concluding Doha would be the best antidote to protectionism and inject a dose of confidence into the world economy. It is also crucial for the viability of a rules-based world trading system that has largely restrained protectionism. A commitment by the G-20 leaders to a grand Doha bargain on agriculture and services trade between India, Brazil, and China on the one hand, and the European Union and the United States on the other, is sorely needed. A window of opportunity will open for just such an agreement between U.S. mid-term elections this November and the 2012 presidential race.
The G-20 faces two broader challenges in the future. The first is keeping the focus on systemic economic policy issues that urgently require global coordination and must be set right before the agenda is broadened. The second challenge is implementation. Many G-20 initiatives encroach upon individual governments’ domestic political levers—such as macroeconomic, exchange rate, and fiscal policies—and for that reason do not include enforcement mechanisms. The G-20’s task is therefore akin to completing a Rubik’s Cube : aligning national interests to produce self-enforcing agreements. That will require hard bargaining—just as the crisis-induced urgency to cooperate dissipates. Managing all these challenges, however, will be the litmus test for the future viability and effectiveness of the G-20 as the new central forum of global economic governance.
