When G-20 leaders convene in London on April 2, they will confront the most parlous global economic situation in seven decades. People and markets everywhere will be looking for tangible signals that the world's leaders are up the challenge of crafting an effective global response. The expectations, risks, and stakes are enormous. If the summit fails to restore confidence, we may see a replay of the 1933 London conference that prolonged and deepened the Great Depression. To restore faith in the future, the G-20 must target the immediate threat and formulate a realistic plan of action.
"If the summit fails to restore confidence, we may see a replay of the 1933 London conference that prolonged and deepened the Great Depression."
The credibility of this plan will depend on whether it distinguishes the urgent from the merely important. The conferees, like physicians, will need to engage in skillful triage, directing the lion's share of attention and resources to the most acute symptoms, while prescribing a longer-term course of treatment for chronic problems. This weekend's gathering of G-20 finance ministers ahead of the summit provides an opportunity for the world's major economies to specifically acknowledge this need. Unfortunately, there is little indication that G-20 governments are making such distinctions. Prime Minister Gordon Brown of Britain, which will host the summit, views the event as an opportunity to launch a "global New Deal" to transform the architecture of international economic governance.
The risk is that participants will so overload the summit agenda that they will get bogged down in long-term issues and fail to respond to the immediate threat. No doubt, the crisis has revealed structural flaws in the rules and institutions governing the world economy. But before we redesign the firehouse, we need to extinguish the fire. Success in London will require credible commitments to restore the global economy and to stabilize world financial markets. The G-20's three priorities should be to:
- Stimulate aggregate demand. Above all, G-20 governments must take additional dramatic steps to stimulate aggregate demand through coordinated fiscal and monetary policy. To date, the "global stimulus package" has fallen short of the scale of the challenge. The United States and China have launched massive spending programs, but Germany, France, and Japan are shirking their obligations and free riding on others. The International Monetary Fund (IMF) could play a catalytic role here, by publicizing relative burden sharing among G-20 members.
- Get credit flowing. G-20 leaders must also announce a coordinated approach to recapitalizing the global financial system that addresses the overhang of toxic assets that has prevented banks from making additional loans. This need not--and given different circumstances, should not--imply an identical mix of policies across countries. But the G-20 needs to bolster confidence that credit will once again flow and reach agreement on general guidelines for how to address the insolvency of national banking sectors.
- Commit to open trade. Despite their pledges on November 15 to refrain from protectionism, seventeen of the G-20 nations have since imposed major trade restrictions, ranging from tariffs to subsidies to licensing requirements. Anti-dumping complaints have soared. As the downturn bites, the influence of protectionist lobbies will only grow. In London, high-minded rhetoric will not be enough. To prevent a collapse in global commerce, the G-20 should agree to freeze any new restraints to trade and to empower the World Trade Organization to monitor protectionist trends. The United States should spearhead a new trade liberalization agenda and work with the G-20 and the World Bank to massively increase trade finance, which has collapsed in many emerging markets.
"The risk is that participants will so overload the summit agenda that they will get bogged down in long-term issues and fail to respond to the immediate threat."
Beyond these immediate priorities, the final London communiqué should commit the G-20 to subsequent negotiations on steps to address chronic shortcomings in the global financial and monetary order. These reforms are essential to reduce systemic vulnerabilities and to update the governance of leading multilateral bodies to reflect today's distribution of global power and influence. Four longer-term goals stand out.
- Improve global financial regulation. One of the most controversial topics on the London agenda is the appropriate scope and nature of new regulations for financial institutions ranging from insurance companies to rating agencies to hedge funds. Proposed reforms include a transnational college of national supervisors, tougher common accounting standards, new rules for capital adequacy, and central exchanges for credit default swaps. To avoid regulatory arbitrage across jurisdictions, the G-20 must make an explicit commitment to developing common approaches to these issues. Forging agreement on the details of this new global regulatory regime will require arduous negotiations over the next year.
- Reform international financial architecture. The global financial crisis has exposed inadequacies in the IMF's resources, mandate, and governance structure. Beyond immediate steps to double the fund's lending facilities and extend special drawing rights to rescue countries in crisis, the G-20 should signal its commitment to begin serious negotiations on longer-term structural reform. Key goals in these talks will be to rebalance country quotas that privilege Europe at the expense of the developing world, to reach agreement that the IMF managing director and the World Bank president be chosen on merit instead of regional criteria, and to expand the fund's surveillance capabilities to better assess systemic risk.
- Address global imbalances. The G-20 members should signal their long-term determination to rectify the massive currency imbalances between surplus and deficit countries, one of the enabling conditions of the global financial crisis. Rebalancing the global economy will involve a painful transition and difficult negotiations between high- and low-savings countries. It will require China to begin floating its currency and the United States to embark on a sustainable fiscal path once the acute downturn subsides.
- Deciding on the future of the G-20. Finally, the United States and its partners will need to determine the fate of the G-20 beyond the immediate financial crisis. Many outside observers assume that the body, which represents 85 percent of the global economy and seems a plausible substitute for an enlarged UN Security Council, will inevitably replace the G8 as the world's de facto steering group. But that is not a foregone conclusion. Several current G8 members--including Russia, Germany, France and Italy--do not favor elevating the G-20 to the leaders' level. And the most powerful potential member, China, remains lukewarm about accepting the responsibilities and constraints of G-20 membership. Given the unwieldy nature of the larger body, the Obama administration would be wise not to put all its eggs in one basket, but rather retain the G8 as a useful caucus of Western countries.
Both leaders and pundits have labeled the upcoming London summit "the most important economic gathering since Bretton Woods." But that gathering was years in the making. Before trying to transform the world order, the G-20 needs to stabilize the one it has inherited.