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With our myriad banking problems, rapidly rising unemployment, looming political battles over the budget, and much more on the pressing domestic agenda, is the G-20 summit in London (dinner Wednesday and meeting Thursday) really worth all the time and effort that the president and his team have devoted to it? And, granted that President Obama has to attend this heads-of-government meeting for protocol reasons, is there much that this summit can realistically achieve; i.e., are there actions that will be taken as a result of the summit that would not otherwise have happened and that can really make a difference to the parlous state of our economy?
These are all reasonable questions. And the answer is simple: In terms of the obvious major issues of the day, this summit is unlikely to achieve much.
But every global economic recovery has to start somewhere and it probably has to begin small. And there are some slight glimmers of hope because (a) President Obama is taking a global leadership role and (b) he is doing this in a creative way that might seem surprising but that should reduce the chance of a further global meltdown.
To be clear, President Obama's team tried to turn this into a constructive meeting that would contribute in a major fashion to a global recovery. They pushed hard for further fiscal stimulus around the world, but were rebuffed by the Europeans (for some of whom—e.g., those who speak German—fear of inflation trumps all other sensible considerations). There is no real summit-related progress on that front, just the usual kind of official window dressing. But it was worth a try and the topic can be reopened in future discussions.
Obama's team didn't push quite as hard for expansionary monetary policy elsewhere in the world to match what Ben Bernanke and the Fed are now doing in the United States, partly because there is an unfortunate anachronistic notion that central banks are “independent” and should not be discussed by heads of government. This leaves the European Central Bank with a deflationary policy stance (in large part, again, because it is dominated by the Germanic anti-inflation obsession). This is dangerous for that whole continent and, given that they comprise around a quarter of the world economy, for all of us.
No one made much progress with financial regulation. None of the G-20 governments really seem to have come to grips yet with the implications of having created large financial institutions that are too big to fail and that derive great economic benefit and, in some cases, political power from this status. At least the United States is beginning to think harder about how to regulate the system, but the positive signs along this dimension are quite limited and have nothing to do with the G-20.
If the summit makes essentially no progress on the big three topics of fiscal, monetary, and regulatory policy, how exactly is President Obama showing leadership and making a difference? Here's the creative surprise: It's by raising a great deal of money for the International Monetary Fund (IMF) and proposing fundamental changes in the way that organization operates.
The IMF currently has about $250 billion to lend. This is not enough to really make a difference in a world of trillion-dollar problems. The Europeans proposed to raise this to $500 billion, which seems still low, particularly as it's mostly European countries that have a pressing need to borrow; you guessed it, the Germans don't want to put up more. The Obama administration is pushing for closer to $1 trillion in total IMF funding and, after a lot of hard work, seems likely to get close to this target.
In essence, this is a clever way to force the Europeans to help themselves. The Europeans won't do it with fiscal or monetary policy, and their regulatory changes, even if meaningful, won't help the recovery. So the United States has persuaded other countries to stuff the IMF full of cash and line it up as the lender of last resort to European economies that now find their property markets collapsing, their currencies under pressure, and their budget deficits increasingly hard to fund.
But that's not all. The masterstroke is simple and also brilliant. The United States is pushing for, and likely to get, the Managing Director (known as the MD) of the IMF to be selected through an open, competitive, and merit-based selection process.
Why is this a big deal? Governance of the IMF has been for too long dominated by Europeans: By convention, every MD has been European since the founding of the organization. The results have been questionable. The MD has enormous power and great discretion on almost all questions: The IMF is subject only to its own rules and its executive board is dominated by…Europeans. This combination wore thin with much of the rest of the world a long time ago.
Deeper governance reform and de-Europeanization of the Fund (e.g., Europe is massively overrepresented in terms of board seats) is long overdue, but the Europeans have been strong enough to slow down the process in the past. As a result, middle-income and poorer countries rightly question if the IMF really works for them or just for the Europeans (and, it must be said, for the United States).
By forcing open the leadership selection process of all international financial institutions (e.g., so this means no more guaranteed job for an American as President of the World Bank), the Obama team has jumped over major roadblocks around IMF governance. It has also formed a natural alliance with large emerging markets (Mexico, Brazil, India, China, South Korea, South Africa, etc), who are also members of the G-20. The natural next step would be to support a new MD from one of these countries. Emerging markets' lending to struggling Europe, through the IMF, is something we should all get used to thinking about.
Arising directly from the G-20 process and this summit therefore, the IMF gets a large amount of cash and the real opportunity to establish broader legitimacy. This should help convince countries that loans from the IMF will come on reasonable terms in the future, and this in turn should serve as a buffer against further downturn.
How much difference will this make? We don't know, but it's a sensible step. Global leadership pushing hard in the right direction is surely much better than what the world experienced before Barack Obama became president.
Based on several posts from the week of March 30, 2009, on Simon Johnson's blog Baseline Scenario.
