The G20: Time for a U.S. Attitude Adjustment

by: John M. Mason

There was an interesting article in Tuesday’s Financial Times. It was interesting because it has always seemed to me that the one who writes the agenda for a meeting is the one that most often ends up controlling the results that come out of that meeting.

And, according to my reading of Gideon Rachman’s comments, that is exactly what Europe is trying to do.

The thrust of Rachman’s argument ties in with my October 5 post, where I discussed the changing nature of the world’s economic and financial relationships as observed in the changes occurring within the G-20 (and the lessening of importance of the G-7) and the jockeying of nations for position within the World Bank and the International Monetary Fund.

Whereas so much attention has been given to the rising strength of the BRIC countries of Brazil, Russia, India, and China, Rachman focuses on the bureaucratic reality of the evolving organizational structure of the G-20 itself. There are three points the author makes that I think are worthy of consideration.

First, Europe dominates the leadership of the G-20. Whereas Brazil, China, India, and the United States are represented by one leader each, the Europeans had eight positions at the conference table in Pittsburgh: Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Furthermore, the primary international civil servants at the meeting were all Europeans: Dominique Strass-Kahn, the head of the IMF; Pascal Lamy, the head of the World Trade Organization; and Mario Draghi, the head of the Financial Stability Board. The only other civil servant of similar weight was American Robert Zoellick, the President of the World Bank.

Second, the Europeans seemed to have a better grasp of what is going on in the world than did the other participants at the G-20 conference. Rachman ties this back to the experience of the Europeans at European Union summits. The Europeans seem to be well advanced in the techniques of “bureaucratic paper-shuffling," a process of introducing issues that they never let go of and which have important political implications in the upcoming years. Rachman argues that the European Union “advanced” from the very start “through small, apparently technical, steps focusing on economic issues.” The method used was to build the union through “the common management of common problems.”

Third, Rachman states that, “the kernel of something new has been created. To understand its potential, it is worth going back to the Schuman Declaration of 1950, which started the process of European integration. ‘Europe,’ it said, ‘will not be made all at once, or according to a single plan. It will be built through concrete achievements, which first create a de facto solidarity.’”

The agenda is bigger than forming a G-3 group consisting of the United States, China and Europe. The world of the future cannot be organized by just these three territorial giants. The world of the future is either going to be integrated in a way that many might conceive of as inconceivable, or the world is going to collapse into separate blocks with limited international trade and cooperation.

The model for this last scenario is the world at the start of the 20th century. World integration was discussed then for the world was open in the early 1900s in a way that has not been equaled since. Yet, the world conflict taking place in the 1910s split the nations apart leading up to conflicts of the 1920s and 1930s and the Second World War that followed.

For the G-20 to help the evolution of the world into something approaching the first scenario, the United States is going to have to adjust its attitude. Yes, the United States is still going to be the most powerful nation in the world, both economically and militarily, but it is going to have to change its belief that it can act, either economically or militarily, independently of the rest of the world.

If Rachman is even close to being correct on his view of how the G-20 might evolve, the United States is not going to be able to get away with continually allowing the value of the dollar to decline. The United States cannot have it all! Other countries must adjust their behavior as well (for example, the savings rate in China must fall), but the day is coming when the United States is going to have to accept the consequences of the irresponsible fiscal and monetary policy of the last eight years. And the current administration cannot continue to add to these policy blunders going forward as they now seem to be doing.

Something new is happening, and Nicolas Sarkozy, Angela Merkel and other European leaders are not going to let this opportunity pass them by. They will talk about cooperation with the United States internationally, but they really want the United States to get its shop in order. France and Germany and Britain all went through the economic wringer in the last half of the 20th century as international financial markets took their governments to task for irresponsible fiscal policy and extremely loose monetary policy. They certainly are going to ask for the American government to exhibit a little more discipline going forward.

For people interested in the value of the United States dollar, my view is that the value of the dollar will continue to decline until the United States government stops talking about achieving a strong dollar while running up trillions and trillions of dollars in deficits and actually begins to act to achieve a strong dollar. How long this will take depends upon how much pressure is exerted in organizations like the G-20, the World Bank, the IMF and elsewhere. This pressure will only continue to grow as the G-20 achieves more influence and these other international organizations are given more and more responsibility to oversee international financial markets. This is not, however, going to happen overnight.