Unlike its ill-fated predecessor in 1933, the London Global Summit, vintage 2009, at least did no harm, which in itself is good news, but it did little to provide reassurance, either. In terms of substance, the G20 confirmed agreements reached before the summit on financial regulation and on increasing the funds available to the IMF and MDBs. The IMF clearly is back in business and in fashion. Pre-summit squabbles on fiscal stimuli did not erupt openly, but this is more likely to be a truce than an end to the fighting. G20 summits will become a regular feature of the political calendar – but are likely to remain as inconsequential as G7 summits have become over time.

On financial regulation the G20 leaders endorsed the proposals widely discussed over recent weeks such as the establishment of macro-prudential surveillance at the level of each nation or higher capital ratios, to be phased in when markets normalise. Other decisions such as to dry out tax havens did not focus on the causation of the crisis, they instead were meant to pacify angry taxpayers in countries financing big rescue packages.

As expected, the G20 leaders stressed the need for “global solutions”, “liberalisation”; “the need to eschew protectionism and competitive devaluations”. This is welcome – but such promises were without consequences already after the Washington summit. Thus, the leaders need to be judged by their actions in the months ahead. No amount of fiscal stimuli and IMF resources could compensate for the costs of higher protectionism.

Collapse

It goes without saying that most international summit meetings are long on photo-opportunities and short on substance.  Last Thursday's G-7 meeting did have genuine substance, particularly with regard to expanding the role and resources of the IMF.   The new SDR allocation is perhaps the biggest decision of substance:  those observers who have proposed such a step in the current international crisis, or in past international crises, have usually been dismissed as pipe-dreamers (John Williamson, Dani Rodrik, George Soros, Joe Stiglitz...).    In addition, there seems to have been some forward movement on international regulation of the financial sector, as the Europeans wanted. Although President Obama acquitted himself well overall, the failure to achieve agreement for coordinated additional fiscal stimulus, as the Americans wanted, was probably the greatest shortcoming of the meeting.

I believe the G-20 meeting will be remembered historically, but not primarily for the above reasons.  It will be remembered as the occasion on which primary emphasis shifted from the G-7, the global steering group that until now has had a monopoly on real economic decision-making power, to the G-20.   Of the various substantive ways in which developing countries could and should have been given more representation in recent years, the shift to the G-20 is the first one to have taken place.

Collapse

An assessment of the London Summit must be based not only on what the most pressing issues of the moment are, but also on what the G20 can and cannot achieve given what it is. There are important issues on which the G20 is structurally unable to deliver, because it is too large, too diverse, or simply because such issues cannot be dealt with multilaterally at the level of heads of state and government. The London Summit was a success, not because it solved all the problems – it didn’t – but because it went nearly as far as it could on all the issues on which it did have leverage.

Fiscal stimulus was never one of these. It is understandable that many observers had high expectations on this front, but it was also clear from early on that such expectations were unrealistic. The summit could not be expected to deliver a coordinated fiscal stimulus: no leader in any proud democracy is willing to be seen by his or her taxpayers as committing zillions of their money to please other countries’ heads. In other words, even when coordinated stimulus makes sense from an economic viewpoint, as is arguably the case now, and when individual leaders are convinced that they will need to deliver such stimulus in the near future, as may be the case even of refuzniks-in-chief Angela Merkel and Nicolas Sarkozy, the decision cannot be made and announced at a multilateral summit. Europeans know this from recent experience. In the fall of 2008 the European Commission tried and failed to convince Germany to adhere to a coordinated fiscal stimulus within the EU. But only four weeks later, Germany announced a stimulus of its own, and a quite large one at that time even though it now looks insufficient to many. Barack Obama has been wise to recognize this inescapable political reality, even as it creates frustration in the US.

Likewise, there was little the London Summit could do in terms of fixing banking systems. Strictly speaking, this is not a global issue. Banks are ailing mainly in Europe and in the US. In the US, it is essentially a domestic problem. It has not yet been convincingly tackled mainly because of the humongous amounts at stake, growing public resentment against financiers, and fierce partisan divisions. In Europe, the high degree of cross-border financial integration makes it unlikely that the problem can be fixed separately by individual countries, and therefore there is a pressing need for policy initiatives at EU level, with due recognition of special situations both inside and outside the 27-country Union such as Iceland, Switzerland, or the United Kingdom. The European banking problem has not yet been convincingly tackled, mainly because of the humongous amounts at stake, growing public resentment against financiers, and fierce national divisions. No comparable problems exist in most other G20 nations. In that context, the G20 could not be the format to address the banking industry’s continuing sickness.

If the G20 had no meaningful leverage on either fiscal stimulus or fixing the banks, what value did it have at all? Plenty. What the G20 is really about is global economic and financial institutions. These have a huge role to play, even if that role does not encompass the stimulus and banking discussions. Existing such institutions include the IMF, WTO, IASB, Basel Committee, IOSCO, World Bank, etc. Others certainly need being created, such as a smaller format to discuss global currencies: perhaps a G4 with the US, China, Japan and the Eurozone, as some have proposed. The G20 cannot and should not micro-manage any of these specialized institutions’ tasks: when it tries, it fails. But as it represents around two-thirds of the world’s population and nine-tenths of its economic activity, the G20 has unique legitimacy to shape them, by defining and updating their mandate, governance and funding. That is the G20’s true core business. No other body can do it – the UN could in theory, but is hopelessly dysfunctional in practice. In other terms, the G20’s craft is global architecture, perhaps even global urban design: shaping the framework in which others can then build or restructure relevant institutions, which in turn will do the actual footwork.

In this vision, the London Summit succeeded unambiguously, even if much remains to be done. It initiated reform and greatly strengthened the resources of the IMF, a crucial move at a moment when many emerging countries are on (or in some cases, past) the verge of macroeconomic instability. It recognized the Financial Stability Forum’s good work since the start of the crisis by upgrading it to Financial Stability Board (couldn’t they think of another acronym, though?) and thus establishing an embryo of global systemic or “macro-prudential” supervision, whatever that means, and perhaps more meaningfully, taking initial steps towards ensuring that global standards are implemented and enforced in a globally consistent manner. It signaled commitment to eliminating banking secrecy with the endorsement (“taking note”) of the OECD’s lists of tax havens. Even if you discount all the rest of the declaration, those are no insignificant achievements. Overall, the sense of purpose and focus is still insufficient, but vastly improved compared with the previous meeting in November 2008.

Of course the London Summit has not been a turning point in the world economy. No diplomatic summit could. But it has done as much as could be realistically hoped for. With this success, the shift of G7/G8 to G20 probably becomes irreversible. The divisions and pointless grandstanding of the Europeans, which are massively overrepresented in the G7, make this shift all the more welcome. True, the G20 is a somewhat arbitrary grouping and it is not even exactly a G20, as is attested by the presence of leaders from Ethiopia, the Netherlands, Spain and Thailand on the London photographs. But in spite of all the ambiguities, the format has gained credence by displaying an ability to get things done. Compared with the situation only one year ago, the world now looks slightly better equipped to tackle rapidly mounting global challenges.

Collapse

The more details come out about the hard numbers, the less beef there seems to be. The main advance was a bigger than expected increase in IMF resources, which might not have happened as quickly had the summit not been held. But a lot of important issues have been kicked into the future. At least the failure to issue the now-ritual incantation on completing the Doha round suggests that even politicians have been shamed into recognizing that their words on this issue are vacuous piffle.

Overall, though, the meeting was the message, and perhaps its most important outcome was what did not happen there: it did not break down in disagreement; leaders of "new" and "old" economies did not waste time quarreling about who was responsible for creating this mess and nobody (except possibly the Swiss) went home feeling disgruntled and short-changed.

The meeting looks more like a milestone than a turning point. There is still a very long way to go before the world can start to breath more easily. A solid basis for recovery will require decisive action to clean up toxic assets - on which the leaders offered nothing - and elimination of excess capacity in many industries around the world, starting with cars. Progress here will depend largely on "bottom-up" measures taken at the national and firm level, not on "top down" edicts handed down from the summit. Meanwhile, unemployment in many countries will continue to rise, causing hardship for those affected. In a few weeks or months, I suspect, the warm glow emanating from the Excel Centre will be a distant memory. If Gordon Brown thinks the event was a vote-winner, he should call a snap election now; the odds of winning one are unlikely get any better over the next year.

The big test of whether the G20 (or is it G29?) is a viable forum for global governance has yet to come. It is one thing to construct a veneer of unity in the heat of the crisis when markets are in a state of high anxiety; it is quite another to maintain it once the immediate pressure is off, and participants realize that they may not hang separately if they do not hang together.

Collapse

At the world economic conference of 1933 in London, it was with a killer telegram about the [monetary] ‘fetishes of so-called international bankers’ that Roosevelt put paid to already very wobbly international cooperation. Given a Barack Obama determined to break with the unilateralism of George Bush, the London summit did not have any such risk to contend with. But a limp compromise would have been sufficient to ignite economic nationalism.

The summit of 2 April clearly sought to project the opposite image. So what actually came out of it? On coordination of national stimulus packages, the divergent views were well known: the Americans wanted their partners to do more and Europe considers it is already doing enough. They had no chance of being reconciled, and were not. Beyond the rhetoric the summit took no action. But it was agreed that the IMF would be tasked with evaluating national initiatives and making proposals. So the ball is rolling. If growth does not recover in the coming months, the IMF will certainly be drawing attention to the failings and tabling a plan. It remains to be seen what will happen as a result but at least there now is a monitoring system in place.

In spite of IMF insistence, there was no reference either to a parallel assessment of national programs to rescue and restructure the banks. On this account there is ground for disappointment. A cleaning up of banks balance sheets is arguably the first priority, yet governments procrastinate as if they had not learned the lessons from Japan.

However, while the G20 countries did not agree to change their individual policies, they did rally round what is starting to look like a global policy. The significant increase in the resources of the international financial institutions is key because developing countries are facing an abrupt drying up of capital inflows – from 800 billion USD in 2007 to probably less than 200 USD this year – which for many of them implies balance of payments crises and recession. Public flows therefore had to step in to replace private money. The commitments made (250 billion USD for the IMF immediately, 250 billion more in the short term and 100 billion for development banks) are credible. Alongside this, the IMF is setting up a flexible credit line in order to lend for the first time without any economic policy strings attached. This is a genuine concerted global boost for the South worth potentially around four percent of the GDP of the countries eligible.

A more surprising decision is the creation of Special Drawing Rights (SDRs), the IMF-issued international quasi-currency, to a value of 250 billion USD. By distributing SDRs for free, the G20 is seeking to avoid countries acquiring such reserves by accumulating current account surpluses and thereby helping to deepen the recession. In doing so, they are dusting off a largely forgotten instrument with a circulation today of a mere 20 billion USD and which only the Chinese had shown any interest in recently. No one knows when the SDRs will actually be allocated and since the decision has been to go for a ‘general allocation’ in proportion of quotas, many countries will be handed over liquidity they do not need. But the symbolism is strong.

Against this background decisions about the governance of the IMF and the World Bank fall short of what would be required to ward off widespread suspicion among the developing countries, especially in Asia. The commitment to a further quota reform is a weak one that mentions dates but does not set targets nor even a direction. In a similar vein the declaration indicates that the heads of the institutions should be appointed though a merit-based selection but does not include the mention that this should be done irrespective of nationality. These shortcomings are indicative of counterproductive procrastination on the part of advanced countries. As long as India weighs less than Italy and China less than France, as long as the US holds de facto veto power, and as long as the power-sharing at the helm between the US and Europe still holds, the developing worlds’ engagement with the multilateral institutions and its willingness to renounce to self-insurance through reserve accumulation will remain.

Finally, on regulation, the G20 departed somewhat from the doctrine underlined in Washington in November according to which regulation is primarily a national responsibility. In the aftermath of the Asian crisis, the G7 had created the Financial Stability Forum, taking care not to endow it with any institutions or decision-making power. They very deliberately created loose club rather than a structured organisation. Ten years later, the Forum is to become a Board, the emerging countries are to become members and it is to be given a broader mandate. It is certainly not a World Finance Organisation – banking supervision in particular is to remain a national remit. But if the steps taken are of unequal length, they are all going in the same direction – towards coordination and in some cases centralisation of regulatory policies.

History has not been written, but what has just happened in London at least suggests that it does not necessarily repeat itself. The crisis could have turned countries in on themselves, and it still might. It could also make possible something which yesterday seemed utopian: the contours of economic and financial governance at a global level start becoming discernable.

Collapse