Leaders of the Group of Twenty (G20) meet on the French Riviera this week, but their stay on the Cote d’Azur will be anything but relaxed. The world economy is in deep trouble again, plagued by sovereign debt crises in Europe and the United States, persistent global imbalances and currency misalignments, low growth and stubborn unemployment in developed countries, and inflationary pressures in emerging economies. A year ago at Seoul, the G20 seemed finally poised to transition from an emergency crisis committee to a global economic steering group. The Cannes summit finds the G20 once again at the heart of the maelstrom, in full crisis-management mode.
The narrowed Cannes agenda reflects this reality. When France assumed the G20’s rotating presidency a year ago, President Nicolas Sarkozy proposed a sweeping summit agenda. Paris’ ambitions included an overhaul of the international monetary system and comprehensive "global governance reform"--including enlargement of the UN Security Council.
But ambition has yielded to sobriety. The Cannes action plan will focus on two main goals: bolstering the recent eurozone agreement, to ensure that the continental crisis does not spread worldwide; and restoring momentum behind global growth.
The Cannes summit is the sixth since November 2008, when George W. Bush first convened a meeting of G20 leaders in the wake of the global credit crisis. The G20’s record since then has been checkered. Its zenith was the London Summit of April 2009, which averted a 1930s-style depression by injecting $5 trillion (AFP) into the global economy, including a trillion dollars in new IMF resources. But subsequent summits in Pittsburgh, Toronto, and Seoul saw this diverse coalition of mature and emerging economies begin to fray.
With the world economy once more in crisis, the conditions may be ripe for greater G20 solidarity. But to be considered a success, the summit must achieve six objectives:
- Dampen--and Contain--the Crisis in the Eurozone. After months of dithering, the seventeen eurozone governments have sought to calm global financial markets by ratifying the terms of the European Financial Stability Facility (EFSF) and the dimensions of the Greek bailout. These actions are likely to have only a temporary effect, however. The EFSF remains too small to cope with sovereign debt crises in larger EU nations. It also does nothing to correct a fundamental structural flaw: The eurozone is a monetary union that leaves fiscal policy in national hands. The Cannes summit provides U.S. President Barack Obama and other G20 leaders an opportunity to escalate pressure (PDF) on eurozone leaders. It also gives major surplus economies like China and Brazil the chance to help contain a spillover of the eurozone crisis, by using their massive capital resources to bolster the International Monetary Fund’s crisis-fighting resources.
- Offer a Credible Plan for Macroeconomic Policy Coordination. One of the biggest barriers to global growth is uncertainty about the direction of economic policy in the world’s most powerful nations. To counter this impression of drift and disarray, summit leaders must present a clear message on the steps they intend to take (both individually and collectively) to advance the Framework for Strong, Sustainable, and Balanced Growth (or Framework), which their governments endorsed in September 2009. That framework remains sound, but follow-through--particularly on currency imbalances and sovereign debt problems--has fallen far short. The G20 communiqué should provide a menu of dramatic and credible policy options, based on the reality that not all countries can export their way to growth.
The Cannes summit provides President Obama and other G20 leaders an opportunity to escalate pressure on eurozone leaders. It also gives major surplus economies like China and Brazil the chance to help contain a spillover of the eurozone crisis.
- Give the Mutual Assessment Process "Teeth." At the 2009 Pittsburgh summit, G20 member states endorsed a mutual assessment process (MAP), to evaluate the impact of member-state policies in advancing the goals of the "Framework." Earlier this year, G20 members agreed on indicators to assess macroeconomic imbalances, as well as benchmarks against which such imbalances could be measured. In theory, this marks a huge concession from major countries like China and the United States, which have opened themselves to external scrutiny, including by the IMF. In reality, as former Mexican president Ernesto Zedillo observes, G20 members have weakened the MAP by "deliberately" undercutting the fund’s watchdog function. Leaders can correct this flaw in Cannes by endorsing the IMF’s ability to "name and shame" G20 members, consistent with the surveillance mandate set out in Article 4 of the Fund’s Articles of Agreement
- Deliver on Promised IMF Governance Reforms. The emergence of the G20 as the premier forum for global economic coordination reflects a tremendous and ongoing shift in global economic power from established to emerging countries. In 1990, the advanced market members of the Organization for Economic Cooperation and Development (OECD) accounted for some 60 percent of world GDP. By 2025, that figure will be 30 percent--roughly equal to the shares of China, India, Brazil, and Russia. Most international institutions, however, have failed to adjust their voting and governance structures accordingly. G20 members agreed to modest shifts in IMF quota shares and executive board seats to benefit emerging-market economies, but implementation has lagged. At Cannes, the G20 should provide explicit details of these adjustments and endorse a firm timetable for implementation.
- Show Commitment to Financial Regulation. Three-and-a-half years after the collapse of Lehman Brothers nearly brought the global financial system to its knees, G20 nations have not kept promises to create common prudential standards for major cross-border financial institutions. Obvious dangers include both a reprise of the Lehman fiasco and a "race to the bottom," as inconsistent national rules encourage regulatory arbitrage. The G20’s major institutional innovation to address such risks, the Financial Stability Board (FSB), remains under-resourced and wildly understaffed (with about twenty employees)--mocking U.S. Treasury Secretary Timothy Geithner’s description of the FSB--alongside the WTO, IMF, and World Bank--as the "fourth pillar" of the Bretton Woods system. At Cannes, G20 leaders should commit to giving the FSB the tools it needs--and to expanding FSB membership well beyond G20 countries. The G20 must also take steps to police the world’s "shadow banking system" and strengthen global supervision of risky derivatives markets.
- Revive the Global Trade Agenda. The failure of G20 leaders to throw their collective weight behind multilateral trade liberalization has been a huge disappointment. To be sure, G20 nations have held the line against beggar-thy-neighbor protectionism. But international trade remains in crisis, with a proliferation of trade-diverting bilateral, regional, and "mini-lateral" agreements threatening to fragment the global economy. Over five summits, G20 leaders have repeated their intent to complete the moribund Doha development round of trade negotiations--and done nothing to follow up. Rather than breed cynicism with another ritual incantation of Doha, the Cannes communiqué should focus on two immediate concrete steps: extend duty-free access for exports from the least developed countries, and redouble support for trade facilitation. The G20 leaders should also signal their determination to revitalize multilateral trade negotiations at the upcoming WTO ministerial meeting in December.
As with all G20 (and G8) summits, the final communiqué in Cannes will touch on a variety of other worthy issues--from promoting food security to adopting anti-corruption measures. But its success or failure will be judged by whether the assembled leaders take the bold steps needed to contain financial risks, revive global growth, and adapt old institutions to new realities.