Guest Contributor: Andrew Schrumm, Research Officer at CIGI
Today, the leaders of the world’s major economies are arriving in Pittsburgh for the third G20 summit for economic crisis management. As the motorcades begin to roll into the David L. Lawrence Convention Centre, expectations for completion of the “unfinished agenda” from the previous Washington and London summits are mounting.
Our new special report Flashpoints for the Pittsburg Summit (edited by Andrew F. Cooper and Daniel Schwanen), points out that the G20 continues to face significant tests to reboot the world economy and generate new systems of financial regulation. In it, CIGI experts identify the main challenges for this week’s meetings, and call for concrete action at a critical moment. Among these tests, the G20 must work to;
- Reduce the gap between declaration and action on financial regulatory issues, on reform of the international financial institutions and on protectionist measures;
- Avoid hidden dangers in the winding down of national stimulus programs, by thinking through exit strategies to ensure they do not compromise sustainable economic growth; and
- Decrease systemic risks of ongoing conflicts, by improving communications and knowledge sharing among global and national markets and regulators.
Similar to the agenda of CIGI’09: Towards a Global New Deal – the theme of the CIGI’09 Conference that will open next week at CIGI’s headquarters in Waterloo, Ontario, the Report is concerned with the important structural shoals that remain underneath the apparent immediate success of the collective infusions of stimulus funds. These outstanding policy commitments could yet result in this crisis being wasted or worse recurring.
Continued delay in the implementation of prior commitments has strained attention and confidence in the process. Many of the top issues identified at the first G20 Leaders Summit in Washington, including macro-prudential regulation and reduction of system risk, continue to linger. Indeed, the challenge at Pittsburgh will be to understand in which areas to keep a steady hand and which others present a unique opportunity for important new reforms or corrective actions. Such actions could avoid negative long-term consequences. And beyond the immediate economic crisis, discussions should begin on the future of the architecture of global governance itself.
Steps taken by G20 countries at both the national and international levels to backstop financial markets and institutions, facilitate ongoing lending, and create common policy responses have likely reduced the depth and scope of the economic crisis – these actions have kept it a ‘Great Recession’ rather than a Great Depression II. Most G20 economies have begun to stabilize; others even have witnessed a reversal in the earlier economic contractions - note China, India, Germany and France. As German Chancellor Angela Merkel and others have declared, attention at Pittsburgh should remain on international financial regulation and not be swayed by temporary economic growth upswings.
Key regulatory bodies, notably the Financial Stability Board (FSB) and the Bank of International Settlements (BIS) have been charged with reporting on the development of macro-prudential modes of regulation as part of the Pittsburgh process, and should these bodies produce an acceptable breakthrough, the G20 will need to move quickly to implementation with clear deadlines.
This still leaves the question of how systemically important institutions, markets and products are to be regulated. Has the G20 over-promised by stating at previous Summits that no entity of this kind will escape supervision? However this objective is achieved, the focus should be on the most systematically important institutions that were treated most laxly under Basel II. To enhance the confidence-building measures new financial products could, as recommended by the BIS and others, be registered and evaluated on an ongoing basis by a consumer financial products regulator for the systemic risks they might pose.
Momentum has been building slowly on the issue of macro-imbalances. Indeed, in setting the parameters of summit discussion, US President Barack Obama has warned about repeating historical imbalances in the global economy. Solutions derived from this process should be forward-looking and respect the new balance of economic power. However, as the CIGI report argues, imbalances are treated as politically sensitive and discussion often results in criticism or platitudes. China has been particularly concerned over efforts to address global imbalances fearing such discussion will focus on the significant export surplus and the value of the renminbi.
China and other BRIC countries have raised the global currency situation, in particular with the proposal that reserve currencies be standardized through SDR-denominated notes. A question remains whether currency diversification will be raised publicly as part of the Pittsburgh process. Putting the reserve currency issue on the agenda will induce some uncomfortable questions over the strategic role of the US dollar reserve system. If a new consensus could be forged on international currencies the benefits, however, could outweigh the risks.
The CIGI Report concludes that in the short to medium-term, the G20 Leaders Summit has an important role to play as a ‘crisis committee’ through its working groups, ministerial and leader summits. This form of networked diplomacy has proven to be effective on a number of levels, but faces significant limitations in its ability to promote and monitor systemic reform in the long-term.
Beyond the core economic concerns of this Summit a structural challenge persists. What is the appropriate future architecture of global governance? What role should the G20 take into the future. Should the G20 Leaders continue to meet indefinitely? Or, should it work itself out of its first major job? What will be the best structure and reconfiguration of the global economic architecture that might strengthen long-term and anticipatory governance institutions?
As the editors argue, the results of “Pittsburgh may well define whether the Gx process is moving forward or slipping backward in its efforts to forge effective global solutions.