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Wednesday, Nov. 9, 2011
The Group of 20 stumbles
The Group of 20 was launched from the embers of the 2008 global economic meltdown, a recognition that the world needed a new mechanism to manage economic affairs. The Group of Eight, which had played the role since the 1980s, was considered outdated and incapable of dealing with emerging economic concerns, primarily because its membership did not reflect economic strength and influence.
Yet since its initial meeting at which leaders agreed to staunch the hemorrhaging that threatened to create a new Great Depression, the G-20 has proven every bit as ineffectual as its predecessor. Last week's meeting was no exception.
After two days of talks in Cannes, France, the leaders agreed to "an action plan" that would boost economic growth and strengthen the global financial system, but the details are sketchy and commitments to act must be "tailored to national circumstances." That all-serving hedge effectively undermines the credibility of group action.
The immediate concern of the group was the eurozone crisis. While the primary responsibility for fixing that rests on European shoulders, noneuro nations could do more to backstop European governments, either by supporting the continent's stabilization fund, which is a lender of last resort, increasing the resources of the International Monetary Fund, or taking concrete action to boost their own economies or better balance the global economy. Instead, each member merely committed "to play its part."
Greece was the most pressing agenda item. The country is flirting with bankruptcy and public opposition to the austerity plan demanded as a condition of assistance has been mounting. Greek Prime Minister George Papandreou created a mini-crisis earlier in the week when he announced a referendum on the economic plan, a move that shattered market confidence since a no vote — which seemed likely — could have destroyed the euro. He canceled the announcement within days, but it compounded doubts about his leadership and Greece's commitment to reform.
On Sunday night, Mr. Papandreou and the Greek ruling and main opposition leader Antonis Samaras agreed that the prime minister would step down and that their parties would form a grand interim coalition government.
Italy's fate is equally troubling. The Italian economy is the third largest in Europe, and its mountain of debt is increasingly expensive as creditors doubt that Rome will be able to repay borrowings estimated at $2.5 trillion. Italian Prime Minister Silvio Berlusconi is besieged on all sides, facing multiple personal court cases, as well as the erosion of his coalition, which is split over his personal future and his political program. Mr. Berlusconi's credibility among European leaders is dwindling.
At the Cannes meeting, Italy agreed to let international monitors monitor progress on fiscal reform. European leaders have been pressing Mr. Berlusconi for some time on this point.
To save face, Rome officially "invited" the monitors, which will examine progress every three months. This means that four European governments — Greece, Ireland, Italy and Portugal — will be under IMF scrutiny. That is a remarkable statement about global economic fortunes.
While the IMF will be keeping a close eye on Italy's books, the organization was not given the go-ahead to top up its resources so that it can cope with crises when they occur. There was agreement on the need for the institution to have more tools and more money, but the leaders could not reach consensus on details. Firm decisions are expected next year. The G-20 statement said that the IMF "should work in the next three months on a special account that could be earmarked for the euro zone." Equally important is the need for resources to help other, smaller countries that are being rattled by developments in the bigger economies.
In the lead-up to the summit, there was talk that other governments, China in particular, might contribute to the European stability fund. Chinese officials quickly deflated that hope. Their reticence is understandable.
China should not be expected to do the work — and pay the bill — that Europeans are not willing to do. China should help, as should Japan, Russia, the United States and other stakeholders in the global economic order, but not until the Europeans themselves sort things out. That initial and critical step is missing.
The G-20 communique included other provisos about stimulating growth, supporting domestic demand, and better balance the global economy. Those have been staples of economic declarations for decades — and progress has been fleeting at best.
While the reluctance of governments to commit to firm action is understandable, the very concept of international leadership demands that countries see the world beyond the narrow frame of national interest and that they help provide public goods.
One of the most concrete expressions of this focus on domestic concerns is exchange rate manipulation. The G-20 statement noted that China agreed to move toward "gradual convertibility" of its currency and will "slow the rate at which it is accumulating its reserves." This is the first time a G-20 statement has mentioned China by name in the context of currency convertibility.
The demand for Beijing to accept market-driven exchange rates would have more credibility if Japan had not been intervening in foreign exchange markets to stem the yen's historic rise. But reality does not necessarily follow theory.
Prime Minister Yoshihiko Noda said there was no complaint from other leaders when he explained Japanese actions at the meeting. That is no doubt gratifying to Japanese policy makers, but it exposes the G-20 again to charges that it lacks consistency and can truly lead.