Analysis on the agenda of the G-20 Cannes Summit.
As the G-20 traveling road-show heads to Cannes, the coinage of international summitry risks becoming utterly debased. Restoring relevance to these events requires an agenda that must meet three criteria. The issues must be important, they must be truly international, and there must be some realistic scope for getting agreement on them. At Cannes, only one issue meets all these criteria: enlarging the size and revamping the governance of the International Monetary Fund (IMF). Consider why the others fail to meet these criteria.
Without doubt, the most important issues facing the G-20 are resolving the euro area crisis and the stance of US monetary and fiscal policies. Europe needs to get its house in order. And the United States needs a plan to increase demand and reduce unemployment in the short run while placing public debt on a sustainable medium-term footing.
But these are problems that can only be solved by governments building a political consensus at home. International and public hand-wringing at Cannes will have little role to play, not least because there is little intellectual consensus around some of them. How Sarkozy of France, Singh of India, and their colleagues can help bridge the divide between the Republicans and the Democrats within the United States eludes comprehension. Nor is it clear how the G-20 can broker a deal amongst the Europeans. At most, the imminence of the Cannes summit might be encouraging the Europeans to reach a consensus quickly. But even this effect must be marginal: Market pressure is clearly the decisive factor behind the flurry of Franco-German meetings.
Then there are issues such as China’s exchange rate policy. Certainly, this is an issue which is very directly international in nature and which would benefit from international cooperation. Under conditions of underutilization of resources in the United States and Europe, and because emerging market countries compete with China, an undervalued renminbi is a beggar-thy-neighbor policy with adverse effects on the rest of the world. The problem here is political feasibility. China today is beyond the ability of outsiders to threaten or cajole.
This is not an indictment of China because its behavior is far from atypical. Throughout the history of the IMF, large countries have never subordinated perceived self-interest to the collective good. Between 1946 and 1973, nearly all the major countries reneged on the pledge to maintain a fixed parity. The United States blew up the Bretton Woods system when it acted as a straitjacket on US policies. Europe would not brook interference by the IMF during its Exchange Rate Mechanism (ERM) crises of the early 1990s. The depressingly long list of failed attempts at cooperation, where the policies and interests of the large rich countries are involved, should give pause to efforts to deal with issues such as China’s exchange rate.
Another category comprises issues on the international reform agenda such as strengthening the Special Drawing Rights (SDR) and including the renminbi in the SDR basket. These are genuinely international issues and they may even hold some reasonable scope for getting international agreement. However, quite apart from the fact that the rise and fall of international reserve currencies are likely to be determined organically by market forces rather than by international collective action, strengthening the SDR is hardly likely to change the course of the global economy.
In contrast, increasing the lending capacity of the IMF meets all three criteria. It is truly an international issue and one of great potential value. One of the successes of the London G-20 summit in 2009 was the announcement of the increase in the size of the IMF which helped calm skittish markets. Today that need is even greater.
In 2008–09, the major countries had considerable scope for domestic action to respond to the crisis. Today, with interest rates close to the zero bound and fiscal positions considerably worse, the need for, and the magnitude of, international responses will be that much greater. One big change in the international landscape has been the fact that some of the large industrial countries in Europe—with a collective GDP of around $5 trillion—are now potential borrowers from the IMF. That calls for a large increase in the IMF’s lending capacity of about a trillion dollars, if only as insurance against a catastrophic turn of events.
Will it be possible to secure agreement on a much larger IMF? To be sure, there will be resistance from the status quo powers because the new creditors will rightly demand changes in IMF governance. In my op-ed in the New York Times today I describe the changes that will be required. Much of the additional resources will have to come from the emerging-market economies and oil exporters, but above all China must be given a considerably larger role in the IMF. Europe and the United States will, however, have to acquiesce to the governance changes once it becomes clear that China, as the key credible provider of additional resources, holds the cards.
At Cannes, a focus on strengthening the IMF would be the one step that would be seriously useful, genuinely cooperative, and potentially feasible. A focus on this measure could consequently help salvage the future of international cooperation. Otherwise, it will be yet again be a case of "words, words, words."
*[This article was first published by Peterson Institute for International Economics on October 28, 2011]