G20 summit: New world order?Some G20 nations hope the weekend summit on financial reform will be a modern Bretton Woods, but can it make big decisions without Barack Obama? By Stephen Foley in New York
For the Prime Minister, Gordon Brown, it is a "new Bretton Woods", as important as the 1944 convention that established the modern financial world order. For Nicolas Sarkozy, President of France, it is a once-in-a-lifetime chance to remake the global financial architecture and usher in an era of "regulated capitalism". But beware the headlines that these leaders try to manufacture when they assemble for their credit crisis summit in Washington this weekend.
What we have is a summit without an agenda, on a crisis without an agreed cause, in a country without a functioning government. The US whose outgoing President agreed to hold the meeting under French pressure, and whose President-elect, keen to stress that the US has "only one president at a time", won't even be there has already bristled at European talk of a creating new supra-national regulators and international rules.
So little wonder everyone else is scrambling to downplay expectations for what might emerge, and to lengthen the timetable for achieving results. As one person from the UK delegation put it, "Bretton Woods took two years".
Bretton Woods created the International Monetary Fund, which endures as the one international body powerful enough to prop up governments and economies that run into trouble. It also created a system of fixed exchange rates that failed to endure into the Seventies. Today, despite a financial crisis that is agreed to be the worst since the Great Depression, little yet under academic discussion rises to the level of ambition on display in the New Hampshire mountains in 1944. Certainly, nothing likely to be on the table on Friday and Saturday rises to that level.
Sebastian Mallaby, director of the Centre for Geoeconomic Studies at the Council on Foreign Relations in Washington, is cynical about the summit's origins and its chances of triggering major reform.
"The truth is that national regulators failed, but national politicians don't want to be blamed, and so they blame a lack of international co-ordination and respond by calling an international summit. Lo and behold, we have a G20 summit without an agenda."
Behind the scenes, work on an official communique is already under way, but people with knowledge of the discussions say it is currently broad-brush to the point of bland, and will promise a lot more work still to be done.
The problem is that there is little agreement yet on the necessary counter-factual: what type of financial architecture, if it had been in place, would have prevented a housing downturn in the US from becoming a credit crisis that engulfed the world?
Discussions last week between the countries of the European Union, as it agreed its position before the meeting, were notable by even their lack of agreement about the extent of international regulation that might be desirable. Specific plans, such as a "college of supervisors" bringing together different national regulators to oversee the activities of multinational finance firms, could take flight, but even the EU appears reluctant to let go of national powers, and the US has never previously shown an inclination to do so. The White House has already played down talk it could accede to demands to curb speculation and to regulate hedge funds on an international basis.
Mr Brown, meanwhile, has talked about setting up an early warning system for international crises, but it remains unclear how to get people to listen to it. He has also called for emerging economic powers such as China and those in the Middle East to contribute more to the IMF, and for bolstering that organisation's powers. Meanwhile, China and other countries in the G20 which, unlike the G7, encompasses emerging powers such as Brazil, Russia and India are pushing for a greater say in the IMF as a quid pro quo.
Cash for chairs, Simon Johnson, professor of entrepreneurship at MIT and a former chief economist at the IMF, calls it and this might be the most productive bit of the weekend's discussions. "The Americans and the emerging economies have more interests in common than people suppose. Everyone in the world except the small European countries think that the small European countries are over-represented at the IMF."
Reform of the IMF would have the advantage of bringing in the new powerhouse economies of the world more firmly into the club of leading nations, but there is little agreement on what bargains might then be desirable to strike.
Economists identify big capital flows and leverage as two major contributors to the credit crisis, the first for pumping giant surpluses from China into the US and inflating a housing market bubble that went pop, the second for allowing banks to make bets many times the size of their underlying assets.
Mr Johnson says the discussion of what to do about international capital flows could emerge as an important philosophical discussion in the administration of Barack Obama. Washington insiders and economists are already searching for clues among his economic advisors as to whether they will lean towards the continental European inclination to regulate these flows, or to the British view of laissez-faire and what sort of accommodations can be struck with a Chinese government that firmly controls capital flows and has kept its currency stubbornly low to stimulate its export-driven economy.
"Capital flows are really large and unstable compared to the bucket of money that can be used to lean against the wind," Mr Johnson says. "The default is to do nothing, and just to muddle through, but there have been moments in the past few months when everybody was very scared, and I don't think that those scary things have gone away."
These are longer-term issues that might rise to the level of a Bretton Woods, and they will get little airing this weekend. They may get more if the Europeans succeed in getting agreement on a second summit in 100 days, when President Obama will be in place and his administration's world view will have begun to emerge.
As for the other issues likely to be aired in Washington, a survey released yesterday by the law firm Allen & Overy, of 700 of its global business clients, showed executives split down the middle on the desirability of a supra-national regulator to oversee global financial institutions (continental European business leaders were the only ones to unequivocally support it).
Wim Dejonghe, managing partner at Allen & Overy, said: "Businesses are still reeling from the impact of recent events. They are yet to focus on how better to regulate the markets. We fear that, in the absence of an informed debate that fully engages market participants, we could face a knee-jerk political reaction that is focused on punishing the markets instead of helping them to function efficiently and securely."
It seemed, before the meeting, that these issues of international regulatory co-operation and the desirability of developing international standards will be finessed for the time being.
: November 13, 2008) With the financial crisis in full swing, the leading economic countries, the G7, are now turning to developing nations for support and guidance. President Bush is hosting the first in a series of meetings called the G20 that will include economic powerhouses like China, Russia and Brazil. But, these countries want more say in future economic decisions. With their huge reserves of foreign currency and fairly stable economies, a new world order could be on the horizon.
SOURCES: KBS, South Korea; Al Jazeera English, Qatar; CCTV, China; TVE, Spain; BBC, U.K; CNN, U.S.
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G-20: Shaping a New World Order
NEW YORK (Nov. 14) -- The role of the United States as the world's economic leader will be tested this weekend when emboldened leaders of the 20 most powerful countries meet in Washington to address the global financial crisis.
Some European leaders are hailing the summit as the next Bretton Woods - a reference to the historic talks in the latter days of WWII that in effect made the dollar the world's dominant currency and laid the foundation for the economic order of the past 60 years.
The United States basically ran those meetings. Close to prevailing in the Great War, it was the world's undisputed military and economic leader.
But today, with the current credit crisis partly rooted in America, and with the rising economic might of China and a unified Europe, that dominance is being challenged.
"The Europeans see themselves as taking a position equal to the U.S.," said Irene Finel-Honigman, an international affairs professor at Columbia University specializing in international banking. "We're looking at a different composition of players and a different powerplay. It's going to be fascinating to watch."
Europe's heavy hand
To bolster their position, the Europeans come to the meeting emboldened by their belief that the credit crisis didn't originate on their soil.
They say that means the more tightly regulated European banking model has triumphed over the more lax laws favored in America.
"The initial response was accusing the U.S. of cowboy capitalism," said Finel-Honigman. "But as the weeks passed, it's become clear we're all in this together."
Together or not, deep divisions still exist between the United States and the Europeans, who initially called for this meeting and will be pushing an agenda heavy on new rules.
Their proposals include: Greater oversight of hedge funds and investment banks. Increasing how much money banks need to keep in reserve. More transparent and universal accounting standards. And limits on executive pay.
All that would be accompanied by a new global network of regulators - regulators that would presumably have power over U.S. banks, a potential non-starter with the Bush administration.
"Self-regulation to solve all problems, it's finished," French President Nicholas Sarkozy was quoted saying in the Guardian newspaper last month. "Laissez-faire, it's finished. The all-powerful market that is always right, it's finished."
Moreover, the Europeans are expected to come to the talks presenting a more united front than ever. And they are likely to use one voice to gain international support to counter U.S. policies which many blame for this crisis.
The United States
For the United States, the main goal of the summit will be to derail many of these new regulations, said Robert Brusca, chief economist at Fact and Opinion Economics, a Manhattan consultancy.
It's a goal Brusca seems to fully support.
"The last thing we need is another powerless, toothless, cumbersome global agency," he said. "You need to let [banks] run their business, the government isn't going to run it any better."
The Bush Administration is of the same mindset.
While Bush has agreed some more regulation is needed, particularly when it comes to unifying accounting standards and increasing transparency, he is wary of too much government involvement.
"We must recognize that government intervention is not a cure-all," Bush said in statement just before the summit Thursday, which seemed almost designed to temper European expectations. "History has shown that the greater threat to economic prosperity is not too little government involvement in the market - but too much."
Brusca said the United States should instead focus on what he views as more fundamental causes of this economic crisis - mainly China's unwillingness to let its currency, the yuan, rise in value.
The low yuan, Brusca argues, make Chinese goods unfairly competitive, and prods U.S. consumers buy too much. This gives China its huge trade surplus, which it has used to buy U.S. Treasuries, mortgage-backed securities and other products that allowed all these banks to lend so freely in the first place.
"They have abused the rules of the game, and politically, this is very dangerous," he said.
The Bush Administration may raise this issue at the talks. Getting China to raise the yuan was, after all, one of the administration's highest priorities just a few years ago.
China, Russia, and everyone else. When a consensus is achieved by the G-20 it carries a lot of weight. With its 19 nations plus the European Union, it represents 90% of the world's economy and 75% of its population. But reaching a consensus is the toughest part for such a big and powerful group.
And at this summit, China, Russia, and most developing countries will be pushing for more power, not just within the G-20, but in other, more exclusive clubs like the G-7, the World Trade Organization, and the International Monetary Fund.
With all these nations pushing for such disparate things, it's unlikely much will get done, at least this time around.
The Europeans are unlikely to push China to reform its currency because of what China will likely ask in return, said Sebastian Mallaby, a senior fellow for international economics at the Council on Foreign Relations.
"China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system - meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence," Mallaby wrote in a recent op-ed in the Wall Street Journal. "Naturally, the Europeans aren't proposing it."
And despite America coming to the table with a black eye from selling these rotten mortgage backed securities around the globe, nearly everyone says the country, with its massive economy and long history of solid stewardship, is still in the driver's seat when it comes to setting worldwide economic policy.
"There is no other country that could offer the leadership that would cause the G-20 to come up with anything even worth thinking about," said George Magnus, a senior economic advisor at the Swiss bank UBS.
That means the Europeans are unlikely to get the type of oversight they're proposing.
Combine the wide range of interests, the complexity of the problem, and the fact that the U.S. is being represented by a lame duck president - Barack Obama is not expected to attend - and it's unlikely anything will get accomplished besides, maybe, a commitment to meet again.
"I have quite low expectations of what's likely to be achieved," said Magnus. "This is just the beginning of a long and crucial dialogue."