All of the leaders who came to Washington to save the world’s economies have gone. The meeting room is closed, press releases have been handed out, and the leaders are turning their attentions elsewhere until the next meeting in April, probably in London. In the meantime, the agreed upon agenda will be fleshed out and put forward at the London meeting.
What did they accomplish in the one-day meeting? In terms of concrete, measurable achievements, the answer is simple: they agreed on an agenda for the next meeting. As to whether this agenda is good or bad it will depend on your view of the goals. From the reading I have done of newspaper and blogging sites, opinions varied from exuberance to disgust.
Personally, I saw the meeting as producing everything I thought that could be expected of them. My expectations were low, given that it was a one-day meeting dealing with exceptionally complex issues, and hosted by a President with two months left in office and low approval ratings. Getting twenty ordinary citizens together and expecting to draw them into a consensus in five hours on almost any topic would be a tall order. Make the ordinary citizens world leaders, and throw in as controversial a list of topics as you could muster, and your chances of getting complete agreement approach zero.
A short list of the agenda for their next meeting includes:
- Stimulus spending
- Interest rate cuts
- IMF funding and lending to shore up currencies under attack
- Regulatory oversight on banks and other financial institutions
- Oversight on credit default swaps and credit rating agencies
- Transparent accounting standards for all world-wide financial institutions
- A Supervisory College to meet and discuss world banking developments
- Limiting compensation for financial executives
This is an ambitious agenda. The issues are complex and contentious, with opinions on each issue strongly held and viciously defended. President Bush, for example, takes strong exception to any extension of bank regulation into the international sphere. This issue could not have passed muster if he had a vote, but there is strong opinion on the other side of the Atlantic and Pacific that favors stronger regulation of financial institutions.
Europe is not unanimous, however. An editorial in the Swiss newspaper, Neue Züricher Zeitu characterized the outcome of the summit as "full of huge and empty words." They went on to equate giving up domestic supervision of their banking system to loss of national identity. Wall Street, in America, will probably take about the same position.
Italy's La Repubblica's dramatic headline called the G-20 gathering a "summit of lies."
Germany's Frankfurter Allgemeine Zeitung praised the summit as a "first step on the way to a new world financial order," adding that "important industrial and emerging economies all committed themselves to an improved global framework for reforming the financial markets. This is no small achievement."
Regulation of credit default swaps and credit rating agencies may receive slightly less vitriol or enthusiasm in response, but there will be strong resistance in the U.S. to any curtailment of the ability of private firms to engage in these activities.
The other items on the agenda will probably be opposed in America and Britain, to some degree. If these items are to pass, there will be much negotiation and compromise involved. Anyone trying to anticipate the results will be severely handicapped by not knowing the position of Mr. Obama on these issues. We will simply have to wait and see where he comes down.
The biggest disappointment for me was there was no agreement to take immediate action on the world’s currency markets. Currency prices are in turmoil, with price instability hitting major and minor trading partners. The euro continues to fall with respect to the dollar and yen. The yen is rising too rapidly for Japan to generate the internal growth they need; the higher yen, coming as a result of the death of the carry trade, has put severe strain on Japanese exporters. Profits and exports fell off the table for their major firms, as the yen skyrocketed. Even a major intervention by the Finance Ministry has not reversed its course. The carry trade, using the yen as the borrowed currency, is so huge, that even Japan doesn’t have the reserves to hold back the tide.
It’s even worse for virtually all the emerging market currencies. They are falling like they did in 1998/1999. Even though the economies and fiscal management of these countries are quite healthy, their balance of payments are being pushed into deficit and their foreign reserves are being depleted by the precipitous fall in the value of their currencies.
This kind of price instability needs to be addressed quickly, but the only action taken during the meeting came from the IMF. Pakistan will be given a huge loan by the IMF to help shore up its currency, which has been under severe attack lately. This is a welcome action, but it needs to be expanded by a thousand-fold if stability in the currency markets is to be restored.
The reason nothing else could be done at the meeting revolves around items not shown on the published agenda. For now, the holders of the largest foreign currency reserves are China, Saudi Arabia, and Japan. But, of the three, only Japan is a G-7 member and has appropriate representation in the IMF. China, with $2 trillion of reserves must become a participant in any expanded currency defense mechanism, but, as Robert Hutchings points out in his article about G-20 in the Washington Post,
. . . leaders of influential countries such as China and India made clear their disinterest in participating in global institutions that are dominated by the Western powers. Why should China and India pay attention to an IMF in which their combined voting weight is just over 5 percent and which is always led by a European (with the World Bank always led by an American)?”
Until there is a fuller power sharing arrangement with China, we should not look for them to jump in to rescue the world currency markets. With political conditions in the U.S. as they are, there was nothing more that could be expected from Saturday’s meeting. Hopefully, the Western nations will be able to mount a credible effort to stabilize world currency markets through the IMF until some new deal is worked out. A new deal could not even begin, however, until our new President takes office in January. This is a long time to wait while the global economy plunges into recession and near chaos.
The final analysis of the G-20 meeting may be that its greatest significance was simply its being called into session to work on a global economic crisis. While this may seem to be of little significance, I see it differently. If they did nothing else, the fact that all twenty of the members came and participated in deliberations, and set an agenda for the future marks a boundary of recognition that things have changed. Managing the world's economies will no longer be confined to the top seven or eight nations of the world. Power has shifted to include the newer, faster growing economies.
The G-20 has ascended into the rarified air of the powerful elite, and they will never be satisfied with the old arrangement again. This is as it should be, in my view. This meeting is acceptance of this fact, regardless of its achievements in the realm of policy making. There will be other opportunities to expand the membership of the IMF and World Bank, but the G-20 meeting marks the beginning of the end of the old order.
All these issues will be addressed in London at the end of April. By that time Mr. Obama will have had a few months as President of the United States to shape his position. By the time of the meeting, positions will probably have hardened, so it will most likely be a contentious session. There are so many issues of such importance, however, that the pressure for solution will be high. This will test Mr. Obama’s ability to bring contentious parties to a consensus. I have this meeting marked prominently on my calendar, for the new world order, if it is truly to exist, will be tested in that session.