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G20 - national interests are still controlling the global crisis

08-11-2011 10:30

There was no shortage of topics to discuss at last weekend's G20 meeting in Cannes. Greece's planned referendum - which later was canceled - was what "kidnapped" the posted agenda. Statements about the meeting have subsequently been anything but gracious. Financial Times columnist Wolfgang Münchau wrote that the meeting was comically irrelevant for the global economy's future. How bad was it?

Expectations were high and the G20 meeting was characterized as "the premier Global Economic Forum" in order to meet challenges such as 1) a greater slowdown in the global economy, 2) a growing debt crisis in the euro zone and 3) remaining savings and trade imbalances. These three challenges are intimately linked to each other. That euro zone leaders have worked frantically to present solutions to the debt crisis was important because time was running out, but also because it was a prestige to show the world that the euro zone now solved the equation of building a firewall around Greece by using larger debt write-offs, more capital to the banks and that the support fund would be extended (without any real commitment from the Euro-leaders to bring more money).

Since Greek Prime Minister Papandreou had endangered the whole aid package from the recent EU agreement there was no longer anything for the Euro leaders to show at the G20 meeting. The fiasco was a fact! Furthermore it wasn’t possible to mobilize support from countries like China, India, Brazil and the United States to expand the support fund without additional tax revenue from the euro zone's participating countries. The IMF could possibly have provided support for the euro zone by using e.g. Germany's foreign reserves but that solution was met with strong objections from the Bundesbank.

It can’t be denied that it is strange that a relatively rich region as the euro zone is trying to get poorer countries to give their support. It should rather be in the euro zone, or possibly in the EU, that support must be found.

The problems in the euro zone is accentuated by the fact that Italy's market interest rates are rising, and even though the debt crisis there isn’t alarming, 300 billion euros have to be set into circulation next year to a much higher cost. The uncertainty regarding Italy has increased, and the question is whether the G20 outcome that Italy has agreed to allow themselves to continuously being evaluated in terms of reform efforts will calm the financial markets. More likely is that Italy firstly needs a change of government and that the new government really creates necessary confidence.

G20 countries account for 85 percent of global production. When the group met at the outburst of the financial crisis in 2008, it was relatively easy to stand up for this global thought by giving massive monetary and fiscal stimulus. Now the toolbox is empty. Instead, many of the problems remain: The lingering crisis and the inability to tackle structural problems in the financial sector, savings imbalances and currency wars. Switzerland has tied their francs to the euro in desperation. Japan intervenes to decrease the yen's appreciation. Brazil and the U.S. have either introduced or opened up for trade barriers in order to counter the Chinese Renminbi’s artificially low valuation.

Far more serious than the fact that the euro zone couldn’t present its solved equation, and that the support package only rested for a few days, is the lack of a global crisis management in the G20. All proposals and measures are primarily designed according to national interests. This applies both to climate threats and financial crisis. When interest rates can’t decrease much more and it’s more about countries which have to reduce their budget deficits than adding more stimulus, then it becomes harder to manage the global crisis. The introduction of a Tobin tax on financial transactions in Europe only is hardly viable. It has to be global in order to be successful. To actively try to reduce current account surpluses in e.g. Germany or Sweden is not popular on the home ground. Sweden’s objective is to double exports in five years, and in the end it will be Mars which must become the main market when all countries unilaterally focus on exports.

The failure of the G20 in Cannes can not only be blamed on Greece - it is about unusually difficult challenges and the fact that the countries have not created institutions that put the global economy first. When the G20 and its political representatives have the ability to think globally, it will no longer be comically irrelevant for the global economy's future, but instead seriously relevant.

Economists

Cecilia Hermansson
Cecilia Hermansson
Group Chief Economist, Economic Research Department, Sweden

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