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University of Toronto

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The G20 after the Cannes Summit
Speaking Notes for the Paris Seminar

Nicholas Bayne, London School of Economics
Paris, November 7, 2011

I shall begin with some thoughts on the G20 summit’s interaction with the BRICS (Brazil, Russia, India, China and South Africa) and other emerging powers; with the European Union, contrasted with the United States; and with the G8 summit. Then I shall look at links with the International Monetary Fund (IMF) and the Basel-based financial institutions.

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BRICS, EU, US and G8

In my view the underlying political purpose of the G20 summit is to adjust the balance of power in the international system, to fully reflect the economic advance of the emerging countries in relation to the mature G7. These countries were already growing much faster than the G7 before the 2008 financial crisis struck. The crisis was provoked by private sector extravagance and public policy failure, beginning in the United States and the United Kingdom and spreading to other western countries. The emerging economies, with more prudent policies, survived much better. So recovery from the crisis demanded that the emerging economies sit down on equal terms with the G7, and the G20 summit exactly served this purpose.

But for some time it looked as if, to quote George Orwell, “all the G20 were equal, but the G7 were more equal than others.” The first four G20 summits were all chaired by G7 countries, which thus controlled the agenda and follow-up. There was little opportunity for non-G7 initiative. This worried me a lot at the time of the Toronto Summit in June 2010. But the tide began to turn at Seoul last November, with Korea in the chair. That summit clinched the agreement on reforming the governance of the IMF, for the benefit of the emerging countries, and launched the Seoul Development Consensus, which departed from western aid-giving traditions. Cannes has continued this movement by deciding that no G7 country will chair the G20 summit for at least five years and probably longer. That will give time for the non-G7 members to put their mark firmly on the process.

I think French president and host Nicolas Sarkozy would have liked to prolong the influence of the G7 and especially the European Union. It was he who, at the outset, contrived that the Europeans should be over-represented at G20 summit meetings. But the revival of the crisis atmosphere this year, because of the eurozone’s troubles, made this impossible. Sarkozy was even driven to appeal directly to the China’s Hu Jintao to help the eurozone get out of the mess it was in. The Chinese and other emerging countries with plentiful reserves had already made it clear that they would not help the Europeans unless they helped themselves. But they were ready to provide extra resources to the IMF, which would mean that it could intervene if the crisis got beyond the capacity of the eurozone to control. Thus the continental Europeans implicitly admitted that the emerging countries held the initiative. Italy’s acceptance of IMF supervision of its economic reforms is a clear sign of this. Prime Minister Silvio Berlusconi refused the offer of an IMF loan, but it could yet become necessary. Italy has had to be rescued by the IMF before.

More finance for the IMF was already being discussed at the last G20 finance ministers meeting, on Brazilian initiative. At that time the US and UK opposed it. By the Cannes Summit, the UK had come round to strong support for the idea. But the US continued to reject it, arguing that the IMF had enough finance already. The summit documents could therefore only make vague references to what extra resources the IMF might have. Thus the US is still resisting this shift of initiative to the emerging economies. But this conceals underlying American weakness. As Christine Lagarde pointed out, the US has still not paid up the additional contribution to the IMF it promised back in 2009. The US is rendered powerless by President Barack Obama’s struggles with Congress, especially over economic policy. This will persist until the presidential election a year from now. But in due course the US, like the EU, will have to recognize the new balance of power.

Slightly to my surprise, Obama has decided to take up the US turn to host the G8 summit in 2012. It will take place in Chicago next May, back to back with a NATO summit and just a month before the G20 summit hosted by Mexico. The Chicago Summit is thus well placed to deal with political issues, as the G8 always does. But it is hard to think of economic items that would not overlap with the G20 or at least require the involvement of other G20 members. The development issues that occupied the G8 for so long are now firmly on the G20 agenda. Even economic help for Arab countries, the major topic for Deauville this year, needs to involve China, Saudi Arabia and others. One can have “G8+” meetings, where other countries are invited, as Christian Masset suggested. But I doubt whether other G20 members would agree to join the G8 in this way. I see the G8 summit gradually losing its economic rationale and thus any link to the G20.

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The IMF and the Basel-Based Institutions

Let me now look at the G20’s wider impact. In the fat years of the 2000s, the IMF went into decline. Its handling of the Asian crisis and the Argentine default had damaged its reputation. There were few demands on its resources. Though Dominique Strauss-Kahn warned of the impending crisis as soon as he arrived at the IMF in late 2007, the G7 finance ministers ignored him.

This changed abruptly after Lehman Brothers collapsed in 2008. First the G7 and then the initial G20 summit at Washington turned to the IMF for support and Strauss-Kahn made sure the IMF was equal to the challenge. As the G20 cycle developed, it helped the IMF that the preparatory process was centred on finance ministers and their officials. They were used to working with IMF staff and to drawing on their intellectual resources. It was soon clear that the strains of the crisis would require many countries to go to the IMF for financial support. The IMF went from being almost out of work to having its financial resources hugely increased at the London Summit in April 2009. The readiness of G20 countries to offer yet more resources at Cannes shows that the IMF, under Lagarde as its new managing director, still enjoys their confidence.

This was not an obvious outcome. Many of the non-G7 members, especially from East Asia and Latin America, mistrusted the IMF for the mistakes it had made in the past. But they were brought to change their view by the reforms to IMF governance that improved their voting position and their influence on decision making. These were agreed at Seoul and mean that China, India, Russia and Brazil are now in the top ten IMF shareholders, while the Europeans will give up two of the seats they enjoy on the Executive Board.

The relationship between the G20 summit and the IMF is not always smooth. The IMF is charged to provide the inputs for the G20’s Framework for Strong, Sustainable and Balanced Growth, launched at Pittsburgh in 2009 and intended over time to correct the payments imbalances that underlie the economic turmoil. The debate on the framework has been very contentious, so that after two years’ work the G20 countries could do little more at Cannes than state publicly what they intended to do already. But the IMF has so far kept out of the cross-fire. The G20’s close links to it bring another advantage. IMF meetings provide opportunities to put G20 decisions before the IMF’s worldwide membership, to get their reactions. The IMF staff are also able to speak up on behalf of their smaller members that are not at the G20 table.

Like the IMF, the Basel-based institutions were a sleepy trio in the years before the financial crisis broke. The staff of the Bank for International Settlements (BIS) kept warning the central bankers that the boom could not last, but they took no notice. The Basel Committee on Banking Supervision (BCBS) largely took their lead from the private banks that were stoking up the crisis. The Financial Stability Forum (FSF) coordinated the work of others but did little of its own. But the FSF chaired by Mario Draghi, to its great credit, perceived the severity of the crisis and began work at once on a regulatory response.

The G20 summit has galvanized these institutions to produce fundamental reforms of financial regulation. The FSF was renamed the Financial Stability Board (FSB) and its membership enlarged to match the G20, while the BCBS also got new members. Hitherto these bodies had determined their own leisurely pace of work. Now the G20 summits set their agenda, which was greatly increased in scope, and laid down precise deadlines. This stimulated the BCBS to complete work on the Basel III rules on banks’ capital and liquidity, in time for the Seoul summit. The Cannes Summit has endorsed progress made in the FSB over the last year and strengthened its slender resources. There is still a lot of work to do, including the most intractable issues, like institutions that are too big to fail. Both the BCBS and FSB have new chairs, to provide fresh energy, although I regret that neither comes from an emerging economy.

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In my view, the G20 is well on its way to achieving its underlying purpose of rebalancing power between the old G7 and the new emerging economies. Countries outside the G7 will steer the G20 for the next five years at least. The European Union has been forced by its own troubles to recognise the rise of the non-G7 members. The United States is dragging its feet, but its position is growing steadily weaker, both politically and economically, and the coming elections may not improve matters. In my view, the greater initiative now open to the emerging powers is welcome and overdue. But it may lead to proposals that G7 countries find difficult to accept and we must be prepared to argue our corner. We also need to understand better the domestic forces at work in emerging countries, especially those like China where the policy process is opaque.

In the wider international scene, the G20 summit has developed an organic relationship with the IMF that I see as wholly positive. The IMF now has much greater funds at its disposal to help countries of all sizes that need external help. In turn, the IMF has put its intellectual resources at the disposal of the G20. It serves as a channel between the summit and its worldwide membership and can act as advocate for countries not at the G20 table. The debate on correcting payments imbalances is still unresolved, but so far the IMF’s input has been accepted by all sides.

Likewise, the G20 has stirred up the Basel-based institutions and ensured they keep working away at reforms of financial regulation, even though the problems are intractable. The G20’s links with the IMF, BCBS and FSB are much closer than with other institutions like the WTO or the UN. In my view, that is as it should be. The G20 summit was created to respond to the financial and macroeconomic crises. These are far from over and deserve all its attention.