Finally, a talking-shop worth having

The G20 has been a mild success. If it sticks to boring, pragmatic incrementalism, it might just remain one

ONE of the few winners from the global financial crisis was the G20, a group of the world’s biggest economies. These countries’ leaders have met four times in the past two years to chart a common response to the global recession and find ways to prevent a repeat. With big players from the emerging and rich worlds around the table, the G20 has a legitimacy that is lacking in other economic clubs, such as the rich-country-only G7. In the darkest moments of the crisis the G20 yielded impressive results, from a common commitment to fiscal stimulus to more resources for the IMF. Optimists hoped it could become something all too rare in international economic diplomacy: a talking-shop worth having.

Those hopes can be realised even though there are signs that the G20’s utility has faded as the world economy has recovered. The leaders’ last meeting, in Toronto in June, was a washout. It did nothing to reconcile widening divisions, particularly between Europeans and Americans, over the merits of short-term budget austerity. That feebleness has raised the stakes for the next gathering, in Seoul on November 11th-12th.

Global currency tensions are rising as America’s Federal Reserve embarks on a second round of “quantitative easing” (printing money to buy bonds, see article), as China resists allowing the yuan to strengthen much and as other emerging economies face a surge of capital inflows. If the G20’s leaders manage no more than another mealy-mouthed communiqué, many people will begin to suspect that it—like so many other of the Gs—is a waste of time.

That would be a pity. For behind the scenes, under the energetic chairmanship of South Korea, the G20 has notched up a few notable accomplishments in recent weeks. There has at last been some progress in overhauling the IMF. A reform of the “quotas” that determine countries’ heft will increase the clout of emerging economies. Over-represented European countries have been cajoled into giving up two seats on the board. The IMF has also revamped its lending schemes so that well-run countries have access to large amounts of cash if a crisis hits. South Korea argued, rightly, that such a safety net is essential if emerging economies are able to withstand financial crises without piling up ever-larger foreign-exchange reserves. These are small but important improvements. And, thanks to the G20, they were done quite quickly (at least by the glacial standards of international institutions).

If the Seoul summit is to be a success, the G20’s leaders must apply the same approach—call it urgent incrementalism—to today’s main challenge: rebalancing global demand so that it relies less on overindebted America and more on domestic spending in vibrant emerging economies, particularly China. The process will take several years, and is complicated by domestic politics. In America the Republican victory in the mid-term elections reduces the already slim chances of progress either on short-term fiscal stimulus or medium-term deficit reduction. Fiscal gridlock means extra reliance on quantitative easing to boost the economy. That, in turn, will provoke extra capital flows to emerging economies. And since the main emerging economy, China, keeps its capital account closed and its currency pegged, the pressure on others is all the greater.


A Korean lesson for France

The G20 meeting will not magically resolve these tensions. But it can help manage them. It can provide a common analysis of how far countries’ currencies are over- or undervalued and where current-account balances ought to head. America has proposed limiting these imbalances to 4% of GDP. That is too rigid, but there is plenty of scope for the G20 to agree on the ranges countries’ current-account balances should reach.

Incrementalism, however, even of the urgent sort, may not be grand enough for France, which takes over the leadership of the G20 on November 12th. Nicolas Sarkozy, France’s president, has made clear that he wants a debate “without taboos” on the future of the international monetary system. He wants to tackle big subjects, such as the dollar’s role as a reserve asset (see article). Unfortunately, history suggests that big-picture debates on the future of the international monetary system rarely yield results, while diverting attention from smaller, practical goals. France should take note. The G20 will remain worth having only if it sticks to the art of the possible.

Source: The Ecoomist
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