The G7’s days as the world’s leading body for steering economic policy appeared to be numbered last night, after leading policy-makers said it was close to “extinction”.
Speculation that finance ministers might not issue even a communique after their meeting today was denied, but reflected the mood.
“The G7 is not quite dead, but it is losing its relevance,” Dominique Strauss-Kahn, IMF managing director, told Emerging Markets in Istanbul yesterday. “It’s on its way to extinction.”
He said that the G7 – Canada, France, Germany, Italy, Japan, the UK and the US – had issued “boring” communiques that ministers failed to follow up.
The future of the G7 was put into doubt by the leaders of the G20 countries – including China, Brazil and India – who used their Summit in Pittsburgh last week to designate the new body as the “premier forum for our international economic cooperation”.
Strauss-Kahn said that he expected that G20 leaders would follow up their meetings “especially regarding new regulations and the new supervision of the financial sector”.
Financial markets were rife with speculation yesterday that the G7 finance ministers would not even issue a statement at the end of their meeting this afternoon. Countries were debating the issue as late as Thursday.
“I think it is not yet decided,” a spokesman for the UK Treasury said on Thursday night. “It is a matter for the Italians [who will chair the meeting].”
On Wednesday US Treasury officials were reported as saying that the issue was “under discussion”, although last night a French official was reported as saying there would be a communique.
The confusion only added to the feeling that the grouping is redundant. Mark Williams, an economist at Capital Economics, a London-based think tank, said dropping the communique would mark a “decisive shift of power from the G7/8 to the G20”.
The communiques have increasingly been ignored by markets since 2004, when ministers’ attempts, at a meeting in Boca Raton, Florida, to influence a fall in the dollar against the renminbi were undermined by the fact that the Chinese were not at the discussions.
However Bill White, former chief economist at the Bank for International Settlements, warned that the shift to the G20 would dilute efforts by Europe and US to encourage Asian exporters to appreciate their currency. He told Emerging Markets that the G7 “at least” discussed global exchange rates.
“When you think that the fundamental international architecture of economic policy-making [the G20] won’t discuss exchange rate issues – one of the factors that lead us to this crisis – is worrying,” he said.
China’s managed exchange rate has been criticised for triggering the crisis, by fuelling US consumption and bringing down global interest rates to create asset bubbles. “To say that China is a member of the team but you can’t discuss the rules [for global economic governance] in the G20 is madness”.