When the G20 assumed the role of global crisis coordination committee in the aftermath of the collapse of Lehman Brothers, it earned universal acclaim for its swift and vigorous response.
At summits in Washington and London in late 2008 and early 2009, G20 leaders announced a series of measures which were widely hailed as having played a major role in restoring global growth and economic confidence. Its success raised expectations that the group – comprising advanced economies as well as leading emerging nations – could evolve into a global economic steering committee to coordinate policy across developed and emerging markets.
The mood has changed significantly since those heady days of global cooperation. Subsequent G20 summits in Toronto and Seoul failed to achieve meaningful progress on the ambitious range of issues on the agenda. If anything, they served to underline divisions rather than unity among member countries.
With leaders of the 20 member nations gathering in Cannes this week for the culmination of the French chairmanship, the onus is now on the group to recapture its previous spirit of unity while taking further action to prevent the eurozone crisis exploding into a sharp global downturn.
But the long-term credibility of the G20 as an organization is also at stake. If an agreement is reached on concrete actions that can galvanize growth and stem financial market panic, it will confirm the group’s status as the only organization capable of pushing through a coordinated policy response to pressing global economic challenges. If nothing meaningful emerges, however, it will add to growing criticism that the group lacks both leadership and legitimacy in an increasingly divisive global economic environment.
The challengehas been made harder still by fears that Greece could default or crash out of the euro, an issue that has cast a shadow over the Cannes summit.
FRANCE’S GRAND DESIGNS
When France assumed the G20 presidency late last year, it announced a bold list of policy priorities, including reform of the international monetary system, strengthening financial regulation, combating commodity price volatility, ensuring food security and supporting infrastructure development.
A report by the Palais Royal Group – which includes former policymakers, central bank governors, academics and financial executives commissioned by the French government – outlined an overarching vision for an overhaul of the international monetary system in which the IMF would conduct surveillance of member governments’ policies to ensure they were conducive to global economic, monetary and financial stability.
Writing recently in Emerging Markets, former IMF managing director Michel Camdessus, who is also one of the report’s lead authors, argued that its recommendations “would go a long way to ensuring the discipline and stability that are so urgently needed to provide a base for sustainable economic growth and employment creation.”
“When the G20 meets in Cannes, we will be looking for significant steps toward a multi-polar monetary system that the world needs now,” Camdessus wrote. “Adopting an approach whereby we once again somehow ‘muddle through’ is simply no longer adequate.”
EURO FOCUS
But the spectre of renewed financial crisis means that leaders’ focus in Cannes is likely to be far narrower than Camdessus or the French chairmanship would wish.
Instead, the immediate focus will likely be on securing global backing for European efforts to contain Greece’s debt crisis and prevent contagion spreading to core eurozone economies and the seizing up of financial and banking sectors. “The agenda will be substantially reduced in Cannes, because the focus will be on how to prevent the crisis,” says Paola Subacchi, head of international economics at Chatham House.
“The G20 this year has done some very good work in terms of issues of development, food and energy security, commodity price market stability, financial reforms and all these kinds of things, but Cannes will not do justice to this work because of the crisis.”
“I’m not sure that the G20 [summit] is going to be able to give much attention to any issue other than Europe,” says Jack Boorman, a former senior IMF official.
RESTORING GROWTH
But discussions in Cannes are also likely to focus on ways to boost growth at a time of growing discord over which measures are best suited to that end. “I expect the G20 to come out with an action plan where there is attention to growth. Each country has to put something on the plate,” says Subacchi. “I expect a plan for growth, because we can’t talk about restructuring debt in Europe or consolidating fiscal positions without growth.”
She cites positive messages from recent discussions with government officials from large advanced and emerging economies as a sign that a meaningful announcement in Cannes is likely. “There is very strong political will from Europe to China and India to sort out the mess, because they are all very aware that if they let the situation deteriorate to the point of explosion or implosion, there will be huge systemic consequences for the world economy, and it will be very difficult to clean up the mess.
“So I expect Cannes will be a very good G20 summit, just like London was a very good summit. You can show there is a united front and everyone is together and will fight together against the crisis.”
‘A G-ZERO WORLD’
The severity of the downturn in trade and GDP growth in late 2008 meant that, at the time, global leaders had a common commitment to stimulus-fuelled growth. But today there is far less agreement over the appropriate path for policy.
“The optimal strategy is for countries that have room to manoeuvre and well-anchored medium-term fiscal plans to provide some form of short-term stimulus,” says Ted Truman, senior fellow at the Peterson Institute for International Economics.
Western nations are in no such position today, while emerging economies’ capacity to prime the pumps is also unclear. “The circumstances for countries are more differentiated today than they were in 2009.”
As a result, the G20’s ability to act as a forum for genuine policy cooperation is likely to have been severely curtailed. Ian Bremmer, president of political risk consultancy Eurasia Group, says the group was always constrained and is, by design, unable to provide global leadership.
“The G20 can’t provide structural global leadership in the way that the G7 did. It’s not just an issue of too many countries; it’s too many countries that fundamentally disagree on core things like economic values, political systems, conditionality and the rule of law.
“The G20 is aspirational, but it doesn’t work, and it’s not providing leadership. What we actually have is a G-zero world, characterized by an absence of effective global leadership and governance.”
GOVERNANCE CONCERNS
Significant concerns remain over the G20’s governance and legitimacy. Chief among these is the unelected and unrepresentative composition of the group itself. Established in 1999 as an informal forum of large developed and emerging economies, in the wake of the Asian financial crisis, its membership hasn’t changed since. Its members do not represent a broader regional or economic constituency.
“One of the problems of the G20 is that they continue to say that they represent 85% of the global economy, but that still leaves out [some] 167 countries, many of which should have a voice,” says Boorman. “If you had constituency representation, you would have a buy-in that doesn’t exist at the moment.”
There is also the question of content and continuity of the G20’s agenda from one year to another, given the rotating nature of the chairmanship and a lack of centralized institutions. “The G20 chair country has firm control over the agenda,” says Jong-Hwa Lee, a ‘sherpa’ at last year’s Seoul G20 summit and former chief economist at the Asian Development Bank.
This means that the agenda can differ dramatically from year to year. This year, for example, the emphasis switched (under France) to reform of the international monetary system, whereas last year (under Korea) it was the need to establish financial safety nets.
A rotating G20 chair is therefore problematic, Subacchi says. Instead a permanent secretariat should be established to institutionalize outreach and reduce the discretion of the chair to set the agenda.
“Each year, the big issue for the G20 president is how to make sure they have a successful summit at the end of the year, because if it’s a flop, it doesn’t reflect well on the country,” she says. “But at the same time, presidents have to make sure they don’t promise too much, so that when it comes to the final summit there is something concrete to announce. This is a very difficult equation to put together, and for each presidency this is the problem.”
But many are reluctant to see the G20 become too “bureaucratic” an institution, Lee notes. The group should “hand off” issues to existing multilateral institutions once it has identified them, says Boorman.
REVERTING TO CRISIS MODE
But without an overhaul of its membership and governance, the G20 may struggle to grow beyond a crisis committee.
“The G20 wants to play a much bigger role and act like a steering committee, but a broader agenda requires the G20 to expand its membership and reach a more inclusive level of consensus,” says Subacchi. “With the broader agenda, the issue of membership is there, because you can’t discuss development, for example, without input from poor countries.”
While governance reform remains crucial to the long-term evolution of the G20, the fact that the issue won’t be high on the agenda in Cannes may actually work in the G20’s favour – in the short term at least.
“With the economy on the brink again, you can’t discuss how to change governance and membership of the G20. What we need to do is just to have enough people around the table and make sensible decisions. This is the G20 at its best,” Subacchi adds.
NO CREDIBLE ALTERNATIVES
So long as leaders emerge from Cannes with some form of meaningful commitment to restore growth and confidence, legitimacy concerns are likely to be overlooked.
“The proof will be in the pudding. If this grouping of more or less major, more or less representative countries is able to forge consensus on a number of issues, it will be accepted even if there’s some grumbling around the edges,” says Truman. “If it deteriorates into nothingness, with no real results, no moving forward on a full range of global issues, then it will become increasingly derided.”
But for now, he says: “There’s no real alternative.”
There is nevertheless a widespread view that, for all its flaws, the G20 remains the best forum to address global economic issues.
Says IMF deputy managing director Nemat Shafik: “The best place for leadership globally remains the G20. [Its] members constitute about 80% of the world economy between them; it’s the best forum we’ve got at the moment for resolving global economic issues, so I think that’s the place to look for that leadership.”
The group could eventually come to play a genuinely effective role, but only once the US and China overcome their differences and agree on a coherent new order for the global monetary system, says Bremmer.
“It is possible that the G20 might work in the long term, especially if the US and China are able to develop a cooperative relationship. But we’re going to have to get through a very messy interregnum, a very messy period of G-zero, before it’s feasible for an organization like the G20 to work.”
Governance concerns must ultimately be addressed for the G20 to evolve beyond a crisis committee. “These governance and legitimacy issues have to be addressed in the long run,” says Subacchi.
But that’s a discussion “for another time,” she says. For now, “the G20 should stay focused on what is critical at the moment.”