These are my blogs at GMF, building toward the latest book, Peerless and Perilled: America’s Leadership in the Global Economic Order (Stanford University Press 2012).
In Obama’s Trip to Europe, Opportunity to Get World Economy Right
Posted on 01 April 2009.
In his speech in Berlin last year, presidential hopeful Barack Obama stated,”America has no better partner than Europe. Now is the time to build new bridges across the globe as strong as the one that bound us across the Atlantic.”
Bridge-building will be sorely needed in the disintegrating global economy, as President Obama embarks to Europe this week. World trade is bound to plunge by 9 percent this year, the first drop since wartime; world output will be in the red for the first time since the 1930s. The president’s trip – not only the G-20 Summit in London but the subsequent US-European Union Summit in Prague – should be used as the trans-Atlantic partnership always has been, to advance the cause of open markets and vigorous global growth. Bilateral measures will have far-reaching implications: the United States and Europe supply more than half of global trade and 60 percent of world’s output.
There are three main issues to address.
First, the United States and European Union should agree to complete the Doha trade round. Doha is the very best means to halt the worrisome slide toward protectionism around the world, revive global trade, and inject confidence in financial markets. Washington and Brussels find each other at the same side of the table; the EU is now waiting for the hesitant Obama administration to commit.
A grand bargain on agriculture should seal the deal. The United States should cap distorting subsidies at the level of current payouts in exchange for India’s letting go of a quick trigger of safeguard measures against agricultural imports. The conclusion of India’s election cycle in May provides a timely opportunity. The United States and EU can add to their weight by engaging China, which has an interest in Doha to stimulate its export-dependent economy.
Much besides agriculture hangs in balance – freer trade in manufactures and worldwide trade facilitation that would grease US and European companies’ global supply chains, and the very rules-based world trading system the trans-Atlantic partners have painstakingly constructed in the past six decades.
Second, the United States and Europe should to fix the global financial system. This not only means for Washington to push Europe to spend more. Europeans have adamantly balked for fear of mounting budget deficits, arguing that the continent’s generous social spending is plenty and unmatched by US benefits.
A constructive way to engage Europe is to tackle global financial imbalances, a major cause of the financial crisis. Now shrinking with the economic downturn, the imbalances will rebound and render America again the world’s buyer and borrower of last resort – and widen US fiscal deficit – unless tackled at the sources through domestic consumption and investment in Asia, and stronger growth in Europe.
The related issue of China’s undervalued currency has poisoned trade policymaking on both sides of the Atlantic and provides an excuse for protectionism. Europeans are a willing partner to reinforce China’s positive steps to boost domestic demand rather than exports.
Third, the United States and Europe need to revitalize the transatlantic marketplace. Europe remains critical for America’s economy: it is the target of half of our foreign direct investment and nearly a quarter of our exports.
Both Washington and Brussels have been gazing at – and competing in – Asia, negotiating their respective trade deals with Korea and other countries, and seeking investment inroads into China.
Reviving the neglected Transatlantic Economic Council would bring focus to the bilateral relationship. The common frenzy to regulate and supervise financial services requires bilateral coordination. Transatlantic companies need a single set of rules for the proliferating standards and regulations in such areas as cloning. Cooperation is called for to shore up the ailing Eastern European economies, which risk upheavals undermining the EU economy. Freeing bilateral trade in services would generate new gains to both sides.
The administration should also think about a broader transatlantic trade pact. The EU already has a comprehensive trade agreement with Mexico and is pushing for another one with Canada; including the largest transatlantic economic relationship on this list makes perfect sense and would be far less politically sensitive than are deals with low-income nations. It could even compel the reluctant players to conclude Doha – and would deepen bilateral ties beyond the global deal.
The US-EU relationship is critical for catalyzing global recovery. President Obama’s trip provides an opportunity of just that stature.
Now that it’s over, next challenges for the G-20
Posted on 26 September 2009
Besides resolving to clamp down on bankers’ bonuses, the G-20 summit in Pittsburgh produced two major results. The first was a pledge to expand emerging markets’ say and sway in the IMF by increasing their quota by five percentage points to 43 percent of the total. The U.S.-sponsored idea will go some ways to addressing the grudge held by China and India vis-Ã -vis the IMF’s founding fathers and dominant members, Europe and the United States.
The second result was the “framework for strong, sustainable and balanced growth,” code for macroeconomic policy coordination among the main economies, presumably overseen by the IMF. While purported for the longer-haul, the initiative at this point is in good part aimed at propelling domestic demand in China, Germany, and Japan in lieu of their dependence on U.S.-bound exports — a pattern that the Obama administration has deemed unsustainable in the face of the debilitating U.S. fiscal deficit and dampened U.S. consumer demand.
In addition, the leaders reiterated their commitment to conclude the Doha trade round, now setting the end of 2010 as the target.
This is good progress, particularly considering the unruly medley of members summiteering only for the third time. But three immediate challenges lie ahead. The first is the very same issue that has faced the G system throughout its incarnations from a G-4 to G-5, G-7, G-8 and, now, G-20: implementing the internationally agreed macroeconomic policy changes even when they may clash with domestic political imperatives.
Today’s ideas for rebalancing global growth are strikingly similar to those pursued in the mid-1980s, with the only real difference being that the-then China was the other Asian dragon, Japan. The renowned 1985 Plaza Agreement succeeded at committing the United States — also then the world’s consumer of last resort –to tighten its fiscal policy, Japan to boost private demand through tax reform, and Germany to stimulate its economy by cutting taxes. But except for Plaza, the subsequent Louvre agreement, and a few occasions in the late-1970s, for most of its lifespan the G system has self-censored strong commitments for policy changes, and instead focused on information-sharing and debate on global policy issues.
The job for the G-20 is to defeat this daunting past and see the pact to recalibrate the world economy through — including major cuts in the self-defeating U.S. deficit and real commitment by Europeans to get demand going. To be sure, two of the same opportunities that engendered meaningful policy commitments in the past are now in place: a global crisis and American dire straits. Much like during the Plaza years, today’s specter of meaningful reforms in the export-led economies to spur growth from within would surely have not materialized without the seriousness of the U.S. economic bind and relative inability and apparent unwillingness of America to propel global economic demand on its own. The Obama administration has been rather convincing at exhorting this notion to China, Germany, and others ever since the London G-20 summit in April. Beijing is taking the claim seriously, at Pittsburgh signaling commitment to stimulate its economy further.
The second challenge for the G-20 is to live up to its pledge to conclude the Doha trade round — a measure, even if resulting in a “Doha-lite,” that would inject much-needed momentum to the nascent revival of world trade and help counter the crisis-sparked bouts of protectionist practices. The more optimistic observers think the round could indeed be brought to a conclusion sometime in the spring of 2010, a window of opportunity before fall’s U.S. mid-term elections, while the bulk of trade watchers argue for 2011. In the United States, trade will likely continue to be a secondary consideration as long as the major domestic reforms — on financial regulations, health care, and the like — remain pending. The Doha ministerial in November 2009 offers an opportunity to validate the die-hard Doha optimists.
The third challenge ahead is dealing with the outcome of the spree of financial regulatory reforms now in motion around the world, particularly in the United States and Europe. A less discussed issue at Pittsburgh, the reformism has yielded rather remarkably similar proposals. There is general agreement on macro-prudential regulations and the need for system-wide, overarching monitors to connect the dots and identify systemic risks like the build-up of asset bubbles. Basic agreement also exists on regulation on all systemically important institutions, markets, and instruments.
But questions remain. The main economies still struggle to get at the ideal and politically feasible domestic (and, in Europe, regional) regulatory frameworks, contesting such terms as “too big to fail.” And there are some vexing issues related to global financial flows. For one, the existing tools for cross-border crisis management are blunt at best. The lack of common rules on ways to deal with bank failures can entice countries to seal themselves off cross-border finance, lest their tax payers face the dramatic implications of a foreign bank gone bust on their own soil.
Another tough issue facing global movement of money is that the regulatory frenzy may result in differences between countries — especially Europe and the United States — in the stringency of rules, such as on banks’ capital requirements. That valves are screwed tighter in one jurisdiction than in another leaves banks room for arbitrage, a situation that in many ways may not be salutary for transatlantic relations. The best outcome would be to preempt a row with some form of compromise.
A more general issue is the very usefulness of today’s G-system of the nearly fully overlapping G-2 (between Washington and Beijing), the resilient G-8 (among industrial nations plus Russia), and the G-20 supernova. Yes, as flexible coordination tools without heavy obligations, each G is well-suited for the fast-changing world of global finance. Each also allows the members to customize policies and drive at deeper commitments than would be possible in a G-20 alone, let alone in some bigger forum. Pittsburgh helpfully clarified the division of labor between the G-8 and the G-20, making the former the rich countries’ arm for foreign policy coordination and the latter the global economic field marshal.
Nevertheless, the overlap does entail some coordination challenges across the forums, besides risking the wrath of the outsiders. Further, the strength of the G system — agility, responsiveness, customization — is also its weakness: no real-time whistle-blower mechanism, no overarching system of truly sturdy surveillance, let alone enforcement. The IMF is now expected to serve as the referee of the G-20 pledges, a good idea in light of the Fund’s readily available armory of capable PhDs. But to be seen is whether the Fund has the political heft to effectively shame shirking players.
The main litmus test to the G-20 will come as global trade and growth rebound. Promises can be harder to keep when the political pressures produced by the crisis fade. Yet, living up to pledges is all the more important to further and hone globalization, the very force that made the new G members prosper and enter the global club — and which would not have blossomed without strong commitments, made since the 1940s, by the core G nations to open markets and global economic stability.
In the EMF Proposal, Chance to Get the IMF Right
Posted on 10 March 2010
Whatever its merits for rescuing European nations mired in crises, German finance minister’s 7 March proposal for a European Monetary Fund (EMF) provides an opportunity for Europe and the United States to get the future of the International Monetary Fund (IMF) right.
The IMF, a creation of the Bretton Woods accords of the 1940s, was saved by the crisis. Only a few years ago fading into obscurity in the thriving world economy, the global lender of last resort sprung back to business. By the fall of 2009, the Fund had committed over $160 billion in new emergency loans to such nations as Iceland, Pakistan, and Ukraine. Policy consensus shifted rapidly, as well. At the US Treasury’s suggestion, the G-20 pledged to triple the Fund’s lending capacity to $750 billion, and asked it manage the wide-ranging Pittsburgh balanced growth agenda.
Notwithstanding its new windfall and duties, the Fund is under debilitating pressures on its legitimacy and effectiveness. One of the challenges is a specter of disintegration of the global financial architecture €“ right when the globalization of financial markets and crises alike calls for strong system-wide management. The epicenter of this issue is Asia. Regional nations scarred by the Fund’s tough policy conditionalities in exchange for loans during the 1997-98 regional financial crisis are wary of the world body, and back at building national reserves and regional financial arrangements so as to wean themselves off the Fund’s influence.
The Chiang-mai initiative conceived in 2000 created a new network of bilateral swap arrangements in Asia among the ten Association of South East Asian Nations members and China, Japan and Korea (or ASEAN+3). The arrangement was paralleled by the Asian Bond Markets Initiative, and paved the way to discussions on a regional IMF, an Asian Monetary Fund (AMF).
Contributing to the regional drive is Asia’s perceived lack of influence in the Fund. IMF’s governance structures are seen by many emerging markets as unfairly favoring particularly the Western European members. The US-sponsored September 2009 G-20 pledge to expand emerging markets’ voting share by five percentage points to 48 percent of the total by 2011 got a hesitant reaction in Europe. It is also unlikely to go far enough to address the grudges of China and India, whose calls for greater representation on the basis of their economic weight are justified.
Asians’ urgency to foster Chiang-mai accentuated as the Great Crisis breezed through. The arrangement was expanded to a total of $120 billion, and it was “multilateralized” €“ made a regional pool for realizing the very same scale economies that the Fund promotes at the global level. The main powers, Japan and China, agreed on equal voting shares. Perhaps observing Asians, also Latin Americans started discussing regional financial response mechanisms.
Thus far, Chiang-mai has had a link to the IMF: borrowers can draw up to 20 percent of their bilateral or multilateral swaps, but then need to agree on an IMF program, including prescribed policy adjustments, to access the remaining 80 percent. As such, Chiang-mai is much more tightly referenced to the Fund than European and US regional rescue schemes €“ Europe’s balance-of-payments facility, Medium-Term Financial Assistance, and the Treasury’s Exchange Stabilization Fund mostly within the Western Hemisphere €“ ever were.
But given EU and US powers in the Fund, their schemes had a built-in consistency with the IMF. Asians, with less weight at the Fund, do not necessarily agree on the body’s policies, and are more eager to go it alone. A gradual divorce between the Asian schemes and the IMF would risk conflicts and gaps between regional and IMF responses in the face of crises, an outcome problematic for global financial stability.
More generally, completely regionalizing the management of global financial stability would be sub-optimal. The IMF’s inherently global projection provides three benefits that cannot be replicated by regional schemes.
First, for any nation believing in the benefits of sound macroeconomic management both at home and abroad, the Fund provides global policy leverage, something a regional fund delinked from the IMF would not give to the outsiders. The Fund’s policy conditionalities, while not perfect, have made a veritable difference. For instance, most studies show that Fund programs, when implemented, improve the recipient’s current account and international reserves. Contrary to its critics, the Fund’s impact on preventing currency crises and reducing macroeconomic imbalances is also positive. Granted, the Fund has made mistakes €“ and it certainly is no magic wand for misgoverned economies or nations that fail to complete its programs. But many an emerging market could well be a declining market were it not for the IMF’s lending and policy advice. Regional rescues not accompanied by similar demands for good governance would perpetuate moral hazard and, at worst, undercut the IMF’s policy advice.
Second, the Fund’s surveillance and research on the global economy is something regional funds would not and could not replicate. Yet, that crises all too easily globalize requires system-wide monitoring and policy recommendations. The Fund is the only instance in the world to credibly serve as a systemic police patrol and alarm bell.
Third, the Fund imparts a further benefit: it economizes bailouts. Pooling resources and rescuing nations multilaterally makes for smarter policy than hoarding reserves unilaterally or structuring rescues bilaterally, or, given the global spread of crises, rescuing only regionally. That the Fund distributes the burdens of emergency insurance across its 186 members prevents free-riding on the main lenders. Fund expert Randall Henning has found that US contributions to the Fund are matched more than four-fold by other states. Global insurance pooling also makes sense also in that crises do not respect borders: a global fund is required to put out rapidly spreading fires. While regional funds can be an excellent complement to the IMF, managing global surveillance or rescues by relying on them alone would be inefficient and risky.
To be sure, concerns about a world split into regional schemes might be premature. While Asians may have a sufficient kitty for an AMF or a larger Chiang-mai, they are not ready for a separation from the Fund. First, Asia is still much more integrated with the US and European financial markets than intra-regionally. The region’s global exposure calls for multilateral engagement. Second, the regional pool, unless augmented, is still small and untested. Hit rather hard in the current crisis, Korea and Singapore turned directly to Japan and China, and Korea performed its largest, $30 million swap arrangement not with Asia, but with the US Federal Reserve. Third, politics stand in the way. Beijing has grown increasingly enthused about the AMF and made the case for an Asian Currency Unit, but Japan has a large stake in the IMF and wants to continue playing the role of a leading power in Asia. Even if Tokyo and Beijing collaborated seamlessly, political divisions not unlike those at the IMF could erupt between the Sino-Japanese-dominated financial schemes and other nations in the region.
In light of their disenchantment with the IMF and the uncertainties surrounding the regional pool, the first-best strategy for Asian nations for now is unilateral reserve accumulation €“ even if it de-economized the provision of insurance that the IMF is designed to economize, and unnecessarily diverted funds away from regional investments in, say, education or infrastructure.
The EMF debate, if advancing, will have implications on the dynamics in Asia. It will likely inspire Asians, just as the euro and European integration have done in the region. But by necessarily entailing consideration about the link to the IMF, the EMF discussion also presents an opportunity for the EU, along with the Fund’s leading shareholder, the United States, to set a precedent for a constructive complementary relationship between regional funds and the IMF €“ one that can be referenced and leveraged with Asia. This notion should be prioritized over any European urges to completely distance the EMF from the IMF: a Chiang-mai-type link should be viewed as being in the broader interest of Europe in the world economy.
Even if the EMF idea did not prosper, regional initiatives will unlikely go away. The issue requires more thorough discussion. Three steps could be taken.
First, working particularly with Japan, China, and Korea, Washington and Europeans should in the G-20 context fashion a clear set of principles to guide the relationship among the IMF, regional financial facilities, and bilateral arrangements. Money confers influence, but, as President Roosevelt understood in the 1940s, influence can be exercised in a fashion constructive to long-term viability of the global economy. Emerging nations, many with money, will now need to be tied into this paradigm.
Second, US and European support to Asian financial integration should be conditioned on a continued 20 percent link to the IMF. A range of further, non-zero-sum mechanisms can be deployed to foster synergies between Asian schemes and the IMF. One idea is that Chiang-mai members gain voting shares in proportion to their Chiang-mai contributions for Fund decisions concerning the region.
Third, giving emerging Asia and especially China more power in the Fund would unlikely €“ and ought not €“ undo plans for a regional fund. But it would provide Asians greater incentives to hone the multilateral financial system and build complementarities between the Fund and their regional arrangements. The ball is now on Europe’s court. The first step is to give emerging markets the 5 percent share increase, not because it is necessarily the best or the only solution, but because it has already been agreed upon.
Synchronized Swimming and Global Finance
Posted on 23 June 2010
Bank of England Governor Mervyn King’s quip “banks are global in life but national in death” has become a cliché. Round 2 in the financial regulatory reform process must make the remark history. At its 26-27 June Summit, the G-20 needs to step up work toward common principles for countries to jointly unwind ailing multinational banks.
Banking is global, bank resolution rules are not. Although cross-border banks hold 75 percent of European continental banking assets, EU is only now defining common unwinding procedures. Nearly a quarter of US banking revenues come from outside the United States; yet, pre-crisis, the United States did not even have domestic resolution rules for non-depository institutions such as AIG and Lehman Brothers, only for commercial banks like Washington Mutual or IndyMac.
National rules conflict. While the United States, Japan, Switzerland, and UK have special insolvency regimes overseen by regulators, only general bankruptcy law, enforced by courts, applies in France, Germany, and the Netherlands. Criteria and powers for declaring a bank insolvent and unwinding it vary. Supervisors in China, India, and Thailand cannot declare a bank insolvent, while in Korea, Singapore, and Malaysia they can.
Complexity burgeons in the case of sprawling financial entities with interconnected branches and global subsidiaries. Lehman Brothers alone consisted of 2,985 entities across 50 countries. Conglomerates like Allianz, Credit Suisse, and Citigroup that combine banking, securities, and insurance are particularly thorny, as countries tend to have separate regulators for each area.
The main problem is money. Each country’s authorities are bent on protecting domestic depositors and taxpayers, and by default discriminate against foreign depositors and shareholders. With regulators passing the buck, confidence in the troubled bank erodes, practically guaranteeing its disorderly, costly, and politicized failure.
International management of floundering banks looks more like a rugby scrum than the synchronized swimming it should be.
As the Belgian-Dutch consortium Fortis ailed in 2008, cooperation among Belgium, Luxembourg, and Netherlands ended in a clash of national supervisors and resistance by shareholders. Markets lost confidence, and Fortis was split along national lines.
Many countries are too small to unwind their global banks alone. Crashing in October 2008, three Icelandic globe-trotting banks had assets more than ten times Icelandic GDP, and their foreign clients numbered more than Iceland’s population. Instead of insuring foreign depositors, Iceland froze their accounts. Insurance burden was passed to incredulous host nations.
Larger economies are also exposed. While the assets of Bank of America represent “only” 15 percent of US GDP, those of UK’s HSBC, in dollar terms equal to BofA’s, constitute 96 percent of UK GDP. More than 30 European banks are bigger than BofA vis-à-vis their respective home economies.
Chaotic bank failures risk contagion among the intricately interlinked banks – and tempt barriers against foreign banks that would jeopardize the benefits of globalized banking.
At their September 2009 Summit in Pittsburgh, the G-20 pledged to address cross-border resolution. Basel Committee has since issued detailed proposals. But odds against rulemaking are daunting – political resistance by shareholders and unsecured creditors, fleeting sense of salience amid the recovery, and, as long as fiscal authority is national and public plays a role in bailouts, regulators’ incentive to protect taxpayers. Worse, attention is focused on peripheral issues like bank tax and bankers’ pay.
Yet, success is possible: refueling Belgian-French Dexia in 2008, Belgium, France, and Luxembourg agreed on burdens equal to national ownership stakes.
Absent common rules, national authorities continue vying to maximize the interests of national stakeholders, small fires can flare into bonfires, and protectionism looms.
Ideas to undo the problem by ring-fencing banks into national companies or axing them into “small enough to fail”-entities are bad. Neither can be implemented internationally; both would increase risk-taking and cost of credit, just like Glass-Steagall did in America. Ideas for a common unwinding fund or detailed burden-sharing rules would face taxpayer resistance and be prone to moral hazard, and take years to negotiate.
Instead, common ground rules must be set – on costs to be shared, division of supervisory powers, and authority to unseat management and transfer assets. Protecting taxpayers can be done without hurting shareholders and creditors, for example through intra-group transfers of assets from an ailing arm to a healthy one. Partnerships between bankers and regulators must replace the unhelpful Wall Street-Main Street dichotomy, including in crafting living wills for banks.
Harmonization of national rules is unfeasible and unnecessary; needed is seamless coordination. Low-hanging fruit like mutual recognition can be picked.
The last thing taxpayers anywhere would want to do is to pay for the failures of foreign banks.
The issues is prime territory for trans-Atlantic cooperation, both because EU’s progress on the issue, and because most US overseas bank activity is with Europe. Europeans cannot consider the issue an intra-EU one, but, trans-Atlantic and, now with Asians entering the fray, global. At the G-20, Washington and Brussels should propose a high-level, public-private bank resolution group to see global principles through.
The impossible is to undo crises, the possible, to manage their wrath. The risk of over-regulating domestically is now coupled by a risk of under-delivery internationally. Can the G-20 deliver?
Solving the Rubik’s Cube of the G20
Posted on 24 June 2010
This week’s G20 summit in Canada is the first leaders’ meeting since the start of the global economic recovery. While a favorable summit outcome could strengthen market confidence, world leaders continue to face several daunting challenges. In particular, three areas—addressing global imbalances, coordinating financial regulation, and combating protectionism—remain politically thorny.
Global imbalances have exacerbated frailties in financial systems and encouraged trade protectionism in the United States. As part of a concerted effort to contain global imbalances through a peer-review process, the G20 committed to a U.S.-sponsored “framework for strong, sustainable and balanced growth” at the September 2009 Pittsburgh summit. But with trade, credit, and commodity prices recovering, imbalances are once again widening, with the United States, Britain, Canada, Australia, India, Turkey, France, and the southern European nations expected to run greater trade deficits. The mirroring surplus nations are familiar: China, Japan, emerging East Asia, Germany, and the oil producing nations.
To make matters worse, U.S. debt, ballooning due to increased deficit spending, will require even more foreign borrowing. Emerging Asian economies interpret this as a validation of reserve accumulation. Meanwhile, Europe’s fiscal retrenchment and lackluster growth re-emphasize the United States’ role as the consumer of last resort. China’s pre-summit move to revalue the renminbi is positive but also far too limited, and Beijing will continue to be pressed to build a vibrant services economy and stoke consumer-led growth. The other emerging Asian nations – especially Hong Kong, Malaysia, Singapore and Taiwan, all of whom peg their currencies to the renminbi – have few incentives to revalue their currencies before China and Japan do so.
Washington, therefore, urgently needs a plan for fiscal consolidation, and China and the East Asian nations must commit to a staged currency revaluation and structural reforms so as to end their export-dependence. Europe’s gradual recovery, a major topic for the upcoming summit, should not come undone as a result of austerity measures. In the G20, continuity is crucial. The leaders need to dedicate time in each summit meeting to address imbalances, single out laggard nations, and continue to measure progress. The G20 also needs to be able to push for action, calling a special finance ministerial session if necessary.
As for financial regulation, the G20 has tasked the Financial Stability Board (FSB), a Basel-based forum re-launched by the G20 and composed of national financial authorities, to propose ways to coordinate regulatory policies. Coordination is necessary for fueling global finance and banking. Progress has been made on the “Basel III” capital requirements, which establish the amount of capital a bank has to carry in its vaults to cushion against emergencies, with agreements expected this year. Transatlantic coordination, however, has been overshadowed by acrimonious disagreements over bank taxes and accounting standards, as well as tighter rules for hedge funds and derivatives. Paris and Berlin argue for sturdy common rules, while Washington favors approaches that are not as stringent or coordinated. With the toxic assets and banking crisis centered in the transatlantic arena, emerging markets face less political pressure to reform and are also more resistant to blanket prescriptions.
As a result, the momentum for securing common principles for the resuscitation of failing multinational banks is dwindling. The issue is critical: multinational banks hold 75 percent of European continental banking assets, and nearly a quarter of U.S. banking revenue comes from overseas. Absent common guidelines, each country’s regulators will continue to protect domestic depositors and taxpayers in the event of bank failure, thereby only hastening a loss of confidence in the troubled bank.
Yet harmonizing regulatory policies globally is neither feasible nor necessary. Instead, compatible and non-discriminatory rules are needed to avoid protectionism and politically costly arbitration. Effective cross-border bank resolution requires seamless coordination; mutual recognition represents just the first step. Transatlantic coordination must come first because the region remains the hub of global finance. With Asian nations vying to establish their financial centers, Washington and Brussels share an interest in being the first movers in crafting global principles.
Finally, the specter of protectionism looms large. Fortunately, in contrast to the beggar-thy-neighbor policies of the 1930s, protectionism was subdued during the recent crisis, and world trade is now rebounding impressively. However, high unemployment in the OECD countries will tempt countries to slip back into protectionist positions. The nine-year-old Doha Round, which the G20 has committed to concluding this year, is being held hostage to disagreements over agriculture, manufacturing, and services trade.
Concluding Doha would be the best antidote to protectionism and inject a dose of confidence into the world economy. It is also crucial for the viability of a rules-based world trading system that has largely restrained protectionism. A commitment by the G20 leaders to a grand Doha bargain on agriculture and services trade between India, Brazil, and China on the one hand, and the European Union and the United States on the other, is sorely needed. A window of opportunity will open for just such an agreement between U.S. mid-term elections this November and the 2012 presidential race.
The G20 faces two broader challenges in the future. The first is keeping the focus on systemic economic policy issues that urgently require global coordination and must be set right before the agenda is broadened. The second challenge is implementation. Many G20 initiatives encroach upon individual governments’ domestic political levers—such as macroeconomic, exchange rate, and fiscal policies—and for that reason do not include enforcement mechanisms. The G20’s task is therefore akin to completing a Rubik’s Cube: aligning national interests to produce self-enforcing agreements. That will require hard bargaining—just as the crisis-induced urgency to cooperate dissipates. Managing all these challenges, however, will be the litmus test for the future viability and effectiveness of the G20 as the new central forum of global economic governance.
G20 Bows to Domestic Politics
Posted on 30 June 2010
The G20’s flagship commitments in Sunday’s Toronto Summit are but a reflection of ongoing domestic politics in the leading economies. There are five main outcomes:
1. Fiscal Policy Status Quo Affirmed
G20’s commitment to halve government deficits by 2013 and “stabilize” debt loads by 2016 is not international cooperation, but a statement that describes national policies already in place. Entailing that all countries can adopt the policies they want to adopt, the communiqué struck a balance between thrifty and spendthrift nations, respectively spearheaded by Germany and the United States. It implicitly redeems Angela Merkel, demonized as the frugal Swabian housewife amid Europe’s economic uncertainties, and buys time for the Obama administration to perpetuate America’s epic deficits past the 2012 presidential race. The fiscal policy status quo means two things. One, it merely reflects the familiar fact of international relations: fiscal policy is a sovereign prerogative. Second, the policy status quo also entails widening of global imbalances.
2. Imbalances Continue Widening
Europe’s fiscal retrenchment and US spending, coupled by weak euro and Asia’s continued export drive, are reproducing the global imbalances of the pre-crisis years and reaffirm US role as the world’s consumer of last resort. This is very problematic: trade deficits are America’s familiar precursor to protectionism and continued spending will undermine confidence in US economy. At time of record public deficits, the United States cannot afford to become the world’s de facto buyer. Yet that is happening. Politics stifle moves to the two most immediate requisite reforms – US plan for fiscal consolidation and China’s commitment to a staged currency revaluation and structural reforms to build vibrant services economies and stoke consumer-led growth. China’s pre-summit token revaluation helped Beijing, as intended, deflect G20 attention away from its currency management.
3. Fine Words on Trade Await Action
The G20’s commitment to conclude the 9-year Doha trade round is commendable, but the group has made the same commitment since its first summit in November 2008. And unlike in the September 2009 Pittsburgh Summit where the G20 stated it would seek to conclude Doha by the end of 2010, in Toronto the target date was dropped due to lack of progress and approaching US November mid-term elections. The global trading system that America has championed for decades continues splintering by a race for bilateral accords, a distant second best to a global deal. Granted, the time between mid-terms and 2010 presidential race offers a narrow window of opportunity. Passing multilateral trade accords has historically been easier in America than passing bilateral ones like the ones awaiting approval with Colombia, Panama, and South Korea. The Obama administration would have to sell Doha, as any bilateral ones, as a means to revive US exports.
4. Financial Regulatory Reform “To Be Continued”
US financial reform bill that the House-Senate conference agreed upon two days prior to the G20 Summit gave the United States a first-mover advantage after trans-Atlantic coordination has been shadowed by acrimony over bank taxes and rules on hedge funds, accounting standards, and derivatives. The Summit demonstrated the limits to a politicized drive for tough, global financial regulations at a time when banks rightly plead time to resume lending and European banks await stress tests. G20 abandoned a global bank tax and relaxed the timetable for new “Basel III” capital requirements. With other issues taking the center stage on the G20 agenda, attention to the arcane financial regulatory issues will continue fading and be increasingly relegated to Basel-based organizations. This is not negative: globally harmonized regulations would be wholly unfeasible to negotiate, and they are unnecessary. However, regulatory coordination remains critical in a world where banking is global yet rules are national. Needed are compatible and non-discriminatory rules so as to avoid protectionism and politically costly arbitrage.
5. Dollar and US Order Restored – yet Periled
Upon the April 2009 London G20 Summit when China and Russia called for alternatives to the dollar-centric world monetary order and Western observers revived the debate about euro’s rise to the next global reserve currency, the currency issue now went practically unmentioned. This reflects the absence of alternatives: even the most viable substitute to the dollar, euro, is now damaged for years. A global currency is distant: even for special drawing rights (SDRs) housed at the IMF to be brought to a par with the dollar, an amount of SDRs equivalent to the GDP of France would have to be created. This would be a hugely political endeavor as countries would contest over the composition of the SDR currency basket and Washington would oppose the idea so as to buttress the dollar.
The dollar’s continued prominence symbolizes a broader fact: the hyperbole about American decline notwithstanding, the events in the past two years have only reaffirmed the American world order, one based on free markets and rules-based Bretton Woods institutions, dollar as the global reserve currency, and the very G-system launched as G-4 by the United States in the 1970s. America has also once again played the role of a leader, prodding others to act in the interest of a growing and stable world economy and setting the tone at the G20. However, the fiscal deficit now puts US economy and global leadership at serious risk. Domestic economic discontent all too easily leads to global disengagement. US isolationism in the world devoid of alternative leaders would be hugely perilous. US growth cannot be killed and certainly not by taxes. The Obama administration has to prioritize private sector-led growth and issue a credible plan for reducing the deficit.
The pre-eminence of domestic politics is a familiar feature of international relations. G20’s crisis-induced cooperation too was made in pure self-interest. All main issues on the G20 agenda to date encroach on governments’ guarded levers in domestic politics – monetary, exchange rate, and fiscal policies – rendering enforcement all but impossible. G20’s task is not to overhaul domestic policies for it cannot; rather, it is to align national interests with mutually beneficial deals so as to produce self-enforcing agreements. That will take hard bargaining.
At the November Summit in Seoul, the G20’s attention must be kept on the systemic global policy issues that affect all nations in major ways, inherently require coordination, and continue periling the world economy – imbalances, trade and investment protectionism, managed exchange rates, and the like. These core issues must be set right before the agenda is broadened further. G20 must avoid becoming a white elephant, the fate of many international endeavors. The litmus test for the group’s effectiveness will come as the crisis-induced urgency to cooperate dissipates.
G-20’s Clever Non-Cooperation Will Widen Global Imbalances
Posted on 02 July 2010
G20’s commitment on Sunday to halve government deficits by 2013 and “stabilize” debt loads by 2016 is not international cooperation, but a statement that describes national policies already in place.
Entailing that all countries can adopt the policies they want to adopt, the communiqué struck a balance between thrifty and spendthrift nations, respectively spearheaded by Germany and the United States. It implicitly redeems Angela Merkel, demonized as the frugal Swabian housewife amid Europe’s economic uncertainties, and buys time for the Obama administration to perpetuate America’s epic deficits past the 2012 presidential race.
What does this mean? For one, it merely reflects the familiar fact of international relations: fiscal policy is a sovereign prerogative. But the policy status quo also entails widening of global imbalances. Europe’s fiscal retrenchment and US spending, coupled by weak euro and Asia’s continued export drive, will reaffirm US role as the world’s consumer of last resort.
In this “Bretton Woods III” regime, global imbalances will be sustained by massive US public deficits, not private consumption as was the case pre-crisis. The outcome is troubling for three reasons.
First, trade deficits are America’s familiar precursor to protectionism. US trade agenda is already non-existent, and November mid-term elections postpone G20’s repeated commitments to conclude the 9-year Doha Round even further. The global trading system that America has championed for decades continues splintering by a race for bilateral accords, a distant second best to a global deal.
Second, imbalances undermine confidence in US economy. As current account deficit peaked at 6.5 percent of US GDP in 2006, confidence in the US economy was feared to erode and the dollar deemed to fall by as much as 40 percent. While the crisis was not caused by a “sudden stop” of capital inflows in the United States – instead, as the crisis globalized, money flowed to America in escape of turbulence elsewhere – US debt is now approaching record levels where a sudden stop is more plausible.
What’s more, interest payments will divert resources abroad right when America’s global competitiveness squarely depends on investing in its next generations at home. Catherine Mann estimates that runaway deficits at 10 percent of GDP in 2030 would entail an annual transfer of 7 percent of US GDP overseas in debt payments, the equivalent to the output of New York state.
Third, a rebound of imbalances complicates the US-sponsored G20 “Framework for strong, sustainable and balanced growth,” a concerted effort to contain imbalances through a peer-review process. The G20’s credibility is at stake: how the group deals with the imbalances will be a key barometer of its performance. Unlike the other items on its agenda – financial regulations, IMF reform, trade liberalization, and so on – that will ultimately be dealt with in other forums, the imbalances are and have been the core competence of the G system since its founding in 1973. The collaboration, while grudging, had its successes, most notably the historic 1985 Plaza Accord among the G-5.
At time of record deficits, America cannot be yet again become the world’s buyer. Yet that is happening.
Washington urgently needs a plan for fiscal consolidation. Growth cannot be killed and certainly not by taxes, already because tax revenue hinges on robust growth. But instead of indebting America further, the Obama administration must issue a credible plan for reducing the deficit and prioritize private sector-led growth. President Obama’s commission on national debt must think bigger and for the longer haul than stopping at advocating a value added tax. The trade-offs are meager: any negative effects of reduced spending are consistently offset by greater availability of capital investment. Historically, robust investment and growth have been sustainable only on the back of domestic saving.
America’s main counterpart in the global balancing act, China has to do it share. Beijing’s pre-summit token renminbi revaluation helped it, as intended, deflect G20 attention away from its currency manipulation. China must commit to a staged currency revaluation and structural reforms so as to end its export-dependence. Emerging Asian nations have scant incentives to revalue their currencies before China and Japan do so. Beijing needs to be a wayfarer in building vibrant services economies stoking consumer-led growth.
In the G20, continuity is crucial. The leaders need to regularly dedicate time to addressing the imbalances, single out laggard nations, and continue to measure progress – and act in its absence, such as by calling a special finance ministerial.
Rubber hits the road in the November Summit in Seoul. Without action by all key governments, the G20 will be relegated to a talk shop without stomach for tackling global economic challenges. The best factual statement of national policies then would be about saving in America, growth in Europe, and robust import demand in Asia.
The IMF’s Thorny Transatlantic Feud
Posted on 09 September 2010
WASHINGTON — In a move likely to please China, India, and Brazil, but force a confrontation with Europe, the Obama administration last month blocked plans that would maintain the current size of the board of directors of the International Monetary Fund (IMF). This is the strongest U.S. effort yet to boost emerging markets’ influence in the world financial body. Washington wants a 20-member board, down from the 24, with Europeans, currently holding nine chairs, incurring the cut. Europeans balk at the idea. The standoff will have to resolved by October 31, when the mandate of the existing board expires, and the institution will become rudderless.
The American demands are nothing new. The George W. Bush administration called for shrinking the Fund board by halving the number of European chairs. Germany, France, and Britain have long had their own, non-rotating seats on the board, while Belgium, the Netherlands, Spain, Italy, Denmark, and Switzerland represent groups of countries.
Another bone of contention is the Europeans’ (EU members plus Norway and Switzerland) 34 percent share of the Fund’s voting power, the largest regional voting bloc. The United States holds a 17 percent share, enough to give Washington a veto over the rare but important decisions that require an 85 percent majority. In contrast, China, now the world’s second largest economy, has its own chair on the board, but holds only a 3.7 percent of the Fund’s voting power, less than France or the U.K. India’s share is 1.9 percent.
At the September 2009 G20 Summit in Pittsburgh, the BRICs – Brazil, Russia, India, and China – called for a seven-percentage-point increase in emerging markets’ voting share, so that their collective share would equal that held by the advanced countries. They also demanded changes in the Fund’s board and a “merit-based” selection of the Fund’s director, which is, by tradition, given to a European. The United States suggested a compromise: a five-percentage-point increase in the emerging market quota, to be attained by 2011. This got a hesitant reception in Western Europe, the likeliest loser in any such reshuffling.
The United States believes that emerging markets, if sufficiently disgruntled with the status quo, will become increasingly difficult to work with on international economic issues. Washington also worries that instead of growing into responsible stakeholders in global governance, emerging markets will drift away from the Fund and set up parallel regional financial facilities, where the United States and Europe would have no influence.
The recent chair demand also reflects Washington’s frustrations with Europe’s persistent opposition to IMF reforms and unhappiness with European austerity measures.
In Europe, however, the chair issue is particularly thorny. The European Commission has long called on the member states to converge on a single chair, which would give Europe veto power in the IMF. The head of the European Central Bank, Jean-Claude Trichet, recently made a similar plea.
The reapportionment of chairs is not so far-fetched given Europe’s increasingly integrated foreign policy and financial regulations. Eurozone members already inherently share a position on exchange rate matters at the IMF, for example.
But no European nation wants to yield. One reason is that Europeans pursue distinct national agendas in the Fund. For example, Germany worries about the inflationary effects of IMF loans, the U.K. tends to focus on financial policy and regulatory issues, and the Netherlands and the Nordic countries stress concessionary finance to the poorest countries.
Intra-European politics are also at play. No European leader wants to pressure his or her counterparts into relinquishing powers, as that could jeopardize subsequent collaboration in European affairs. France and Britain want to avoid an outcome where Germany remains the only European sovereign in the Fund’s non-rotating top-eight, and certainly resist losing their sway vis-à-vis China or Russia.
Europeans also resist change to extract concessions, such as a commitment by emerging nations to embrace Fund assessments of global imbalances and exchange rate policies, and to increase their still-low contributions to the Fund.
Europeans are correct to insist that emerging nations match any new rights with new responsibilities. But it may be that boosting emerging countries’ powers is the only way to ensure more responsible behavior. Absent a stake in the system, emerging markets are guaranteed not to play nice. Preserving the post-war multilateral economic order, a stunning transatlantic success story, requires reforming it by tying emerging markets into it.
The first step is for Western Europeans to give emerging markets the five percent increase in their voting share that has already been agreed upon.
Step two is a staged consolidation of the number of European seats on the IMF board. Granted, Europeans have a chance to turn the confrontation to advantage, by counter-proposing that they hold a single chair. That would force Europe to act in a united fashion and lend the continent powers to steer the emerging nations in the right directions.
Both Europe and the United States have a stake in a successful 21st century global order.. To ensure that, it is high time the Europeans acknowledge they need to curb their predominant role in the IMF.
The Seoul G20 Summit is the time and place to sew the next global safety net
Posted on 04 November 2010
WASHINGTON – In preparing to host the November 11-12 G20 Summit in Seoul, the South Korean government has worked to win support for a “global financial safety net,” a rapid response to future global economic crises. Part of Seoul’s vision is greater cooperation in the face of crises between the International Monetary Fund, regional pools of government capital, and central banks.
Seoul’s efforts are part of the global quest for improving sovereign insurance against the next financial crisis.
Multiple insurance schemes already exist, but they are incoherent. Beside the massive national reserves held by China and some other Asian economies, there are now a number of regional financial schemes – such as Asia’s nascent, $120 billion Chiang Mai Initiative currency swap and the $617 billion European Financial Stability Fund created during the Greek crisis. The global crisis also saw a record number of swap arrangements between central banks. The U.S. Federal Reserve alone extended $755 billion to 14 other central banks around the world to alleviate their dollar liquidity shortfalls, while the European Central Bank provided swaps in Europe and for the People’s Bank of China and the Bank of Japan in Asia.
Worried about losing out to alternatives and fragmentation in the global financial architecture, the IMF also supports the safety net idea. The Fund’s Board recently agreed on flexible lending instruments free of conditions to countries with sound economic policies. The Board is currently considering a Global Stabilization Mechanism, a merger of bilateral swap lines supported by South Korea, as a tool of lending on short notice to multiple nations at once.
The drive for a coherent financial architecture is useful in part because of continued weak links in the global economy. Thus far, the regional facilities in emerging markets are rather untested and small. Also, central banks may not be as willing to dispense as many swaps in the future, and are unlikely to do so in a systematic fashion. For example, the Federal Reserve preferred a swap to South Korea to one to, say, Indonesia due to high U.S. bank exposures in South Korea. Research shows that countries tend to provide swaps to nations with which they have important financial and trade ties.
A more watertight insurance scheme for financial crises is also seen as a way to dissuade Asian nations from hoarding foreign exchange reserves, which contribute to global imbalances.
In the creation of a global safety net, the IMF has to take center stage. A global economy and global crises demand system-wide management. A divorce between the IMF on one hand, and regional and bilateral schemes on the other, would risk conflicts and gaps in crisis response. The Fund’s technical expertise and worldwide experience cannot be replicated at the regional level. Regional or bilateral rescues delinked from the Fund would be unlikely to adhere to the same rigorous conditions for good economic governance as demanded by the IMF.
But politics stand in the way of a seamless global financial architecture. Many Asian nations, traumatized by the IMF’s strictures in exchange for loans during the 1997-98 Asian financial crisis, want to sever current links between the Chiang Mai Initiative and the IMF so as to wean the region off the Fund’s – and thus U.S. and European – influence.
In Europe, which has established formal linkages between the IMF and the new European regional financial facility, France and the United Kingdom have signaled support for a Global Stabilization Mechanism. But Germany worries the scheme would make it too easy for countries to obtain loans, encouraging budgetary profligacy and poor economic management.
Central banks, including the U.S. Fed, are unlikely to want to relinquish their authority over swap lines to the finance minister-run IMF.
Both the United States and Europe have an interest in safeguarding against future global crises, averting a race to the bottom in conditions attached to loans, and dissuading Asians from accumulating reserves.
To give the global safety net concept legs, Washington and Europeans should make the IMF more responsive by building formal ties between the Fund and alternative sources of lending, such as central banks and the private sector. But the Fund’s improved capacity to lend must be accompanied by sturdy safeguards against moral hazard.
With key G20 counterparts – China, Korea, Japan, India, and Brazil – Americans and Europeans should also fashion global principles to guide the relationship between the IMF, regional financial facilities, and bilateral, ad hoc financial arrangements. Such principles should address access to funds’ design of lending programs and enforcement of loan conditionality. Europe’s work with the IMF in rescuing Greece sets a useful precedent.
As was painfully learned last year in the European sovereign debt crisis, crises are not a time to weave a better safety net. The time is now, before the next crisis hits. The Seoul Summit is the place.
Supersize the IMF to Rescue Europe?
Posted on 20 October 2011
Washington – In yet another sign of the eurozone members’ inability to stem their regional financial crisis, last week Standard and Poor’s downgraded Spain’s credit rating to AA-. This move has raised new fears about the ability of beleaguered European nations to pay their sovereign debts. And it has revived calls for expanding the International Monetary Fund’s lending capacity to backstop eurozone members. IMF Managing Director Christine Lagarde has argued that the Fund’s readily available war chest of $390 billion would run short should the crisis worsen. Additional resources, perhaps as much as $350 billion, may be needed for precautionary lending to Spain and Italy alone.
This extra arsenal would raise the Fund’s profile further in Europe, where, since early 2010, it has provided a third of the multibillion euro rescues for Greece, Portugal, and Ireland. Such a move would follow the tripling of the IMF’s lending power to $750 billion in 2009. It would also be more modest than then-Managing Director Dominique Strauss-Kahn’s proposal to supersize the Fund by increasing its firepower to $2 trillion.
But key IMF members are balking at increasing the institution’s resources. In mid-October, the G20 finance ministers rejected a proposal to make permanent a special $590 billion pool of Fund resources, which would have raised total lending power to a record $1.3 trillion.
The politics are thorny. The BRICS – Brazil, Russia, India, China, and South Africa – are the main proponents of a funding increase, in part for economic reasons. Despite forecasts by many bullish analysts, emerging markets have not created a new global “supercycle” of widespread growth and prosperity. Instead of becoming decoupled from the advanced economies, emerging economies find themselves held hostage to the transatlantic economic morass. Short of inflationary domestic stimulus, they see in the IMF the best lever to get Europe back on track, reviving global growth and their own economic fortunes.
However, the United States, the United Kingdom, Canada, Japan, and Australia are queasy about ponying up more money, calling instead on Europeans to fix their own problems. U.S. Treasury Secretary Timothy Geithner raised eyebrows recently by calling for the debt-laden Europeans to find their own resources to stimulate their economies.
The Obama administration was the main proponent of expanding the Fund two years ago. But the White House now finds itself up against the U.S. Congress, where resistance to bailouts has only grown since the 1990s large-scale rescues of Mexico and Asian emerging markets. Opposition is reaching a fever pitch as U.S. public debt peaks and many think it is Main Street America, not European welfare states, that should be bailed out.
Overcoming French concerns about U.S. influence via the Fund in Europe, Germany last year demanded the IMF co-manage the eurozone rescues and help design and enforce loan conditions that Europeans would hesitate to prescribe to each other. Berlin, however, worries that a larger Fund would risk moral hazard, encouraging fiscal profligacy in Europe and beyond.
Europe and the United States also agonize over the clout that a larger Fund could lend the BRICS, who would likely foot a large portion of the bill and would then demand more say in how it was used.
But the prolonged crisis casts a dark cloud on the world economy, and Eurozone has proven inept at managing it. Further external pressure would unlikely yield a positive, market-moving policy response. What should be done?
There is a middle ground between the options of no new resources for the IMF and a supersized IMF. One such option would be for the Fund to systematically leverage the financial reserves of emerging markets and sovereign wealth funds. Another would be to allow individual countries, such as China, to make ad hoc loans to the Fund or to contribute to a Fund-managed temporary special-purpose lending facility dedicated to halting the euro crisis.
Provided the response actually worked, all parties would benefit. Europeans would at last be freed to focus on long-term growth and fiscal targets. For the United States, a robust response would halt a crisis that now fuels fears in the transatlantic financial market and hobbles consumer demand in a leading trading partner, contributing to America’s jobless nonrecovery. It could also give the United States, the Fund’s largest shareholder, greater say in Europe, and be at least somewhat more palatable to Congress than a supersized IMF. Emerging markets would enjoy greater leverage in global affairs they covet.
For the IMF, the extra arsenal could pave the way to an exit from a crisis where its success currently depends on intractable regional politics.
Doing nothing is not an option. Policy uncertainty is poison to financial markets, and decisions must be made at the European Summit this weekend and the G20 Summit on 3-4 November in Paris.
The Fund’s engagement in regional crises makes perfect sense. The Eurozone crisis has painfully revealed the political limits to regional crisis management. Asians or Latin Americans would unlikely be much better at collective action. And the Fund’s technical expertise and its global experience are unrivalled. How to best raise money to handle contagious 21st century crises will take much more creative thinking.
G20′s Second Act, Arrested
Posted on 02 November 2011.
WASHINGTON—The Greek bombshell decision to hold a referendum on the last week’s celebrated eurozone bailout package will ensure that the G20 Summit starting on Thursday in Cannes will be hijacked by Europe’s troubles. A source of turbulence in the world economy, Europe’s problems are the world’s problems and should be on the G20 agenda. But the euro crisis risks distracting the G20’s focus from its long-term imperative: ensuring sustained global economic growth.
The International Monetary Fund forecasts a decent 4 percent global growth this year. But that forecast has been repeatedly slashed throughout the year as Europe has failed to contain its crisis and U.S. fiscal plans remain hazy. The IMF now projects Europe will grow by only 1.6 percent and United States by 1.5 percent in 2011. Emerging economies are the silver lining, projected to expand by 6.4 percent this year.
The problem is that emerging market growth has short coattails. Despite bullish forecasts by Wall Street analysts, emerging economies have failed to generate a global “supercycle” of widespread growth and prosperity. Instead, they are hostage to the transatlantic economic morass that slows their exports and rocks stock markets.
But emerging economies could still ride to the rescue. Armed with $3.2 trillion in reserves, China could help bail out Europe. With $4 trillion in assets under management, emerging market sovereign wealth funds could invest in high-growth projects around the world. And by propelling domestic consumption all the while ceasing to manipulate their currencies, East Asian nations, China in particular, could stimulate export-led growth in the United States, which in turn would significantly accelerate global recovery.
But such fixes are neither easy nor likely.
In search of cash to fund last week’s €1 trillion rescue package, Europeans have extended the begging bowl to Beijing. China does have a stake in a solvent Europe, which is its main export market and where China already holds €600 billion of sovereign debt. But the Chinese are unlikely to tap their coffers without clear details on the use of the cash, Europe’s granting of market economy status to China, and, possibly, the silencing of European criticism of Beijing’s human right violations.
Moreover, Beijing’s pockets are not bottomless. After its short-term trade and sovereign debts and funds channeled to its sovereign wealth fund are subtracted from its reserves, China may have no more than about $500 billion available for a European rescue package.
Before the Greek announcement, India, Russia, and Brazil expressed willingness to jump on board and channel funds to Europe via the IMF — provided Europeans swallow a bitter pill: the humiliating use of funding facilities designed for poor economies and, perhaps, the relinquishing of some of their IMF powers.
Sovereign wealth funds are also not about to ride to the rescue. Already chastised at home for their multibillion investments in Bank of America and Citigroup that have gone sour, emerging market sovereign wealth funds are looking for surefire bets rather than extending lifelines to rich nations.
If there is a prescription for long-term, sustained growth, it is global rebalancing. In an ideal world, the United States would export more and Asia would consume more. But today, all countries are looking to grow by exporting, which is sparking currency wars and protectionist posturing. Lacking enforcement tools, the G20’s rebalancing agenda is toothless. And Washington’s calls on China to increase domestic consumption, tighten intellectual property protections, and cease currency manipulation fall on deaf ears.
Today’s economically interdependent, realpolitik world offers two lessons. The first is that while economics may be global, economic fixes are local. The Greece ordeal is an exclamation point to that. Going forward, Europe and the United States must look deep within, much like emerging markets had to do in facing up to their crises. The cost of the Eurozone’s common currency is greater fiscal integration and truly tough-love enforcement regime; the price for future economic dynamism is flexible labor markets and curtailed welfare states. In the United States, the Congressional budget super committee must free the world’s leading economy from its historic debt load. And, rather than waiting for China to appreciate its currency to spur imports, Washington must take charge of its trade agenda — deepen market access in Asia-Pacific, India, and Brazil, and buttress the 30 million-strong army of the United States’ small and mid-size enterprises.
The second lesson is that getting to growth in the interdependent modern world takes far more give-and-take. China, India, Brazil, and other emerging market economies must understand that advanced nations’ recovery and global rebalancing are in their economic self-interest. By paving the way to growth, they would show they global leadership they covet — which, after all, is not about shiny seats in international institutions, but about stepping up to the plate at the world’s hour of need. Besides, now that Greece stripped away any first-mover advantage the Eurozone sought in G20 with last week’s bailout plan, the cash-rich emerging white knights have already gained new powers.
Can Europe Really Cram 17 Leaders in One Chair?
Posted on 22 November 2011
WASHINGTON—The European Commission’s economic proposals to be unveiled on Wednesday will include a call for the Eurozone nations to pool their representation at the board of the International Monetary Fund (IMF) into a single seat. Designed to boost the currency bloc’s clout at a time when emerging markets are seeking greater powers in the world body, the proposal is bound to meet resistance — not in Beijing or Brasilia, but right next door to Brussels, in Berlin and Paris.
The Commission’s calls for a single European seat go back a good decade, and reflect its interest in concentrating power in Brussels. Other prominent sponsors of the idea have included the former head of the European Central Bank Jean-Claude Trichet, EU president Herman Van Rompuy, and the Fund’s former managing director Dominique Strauss-Kahn.
Today, the Commission’s calls are motivated by a sense of a global assault on European powers in the world body. Reserve-rich emerging markets such as China and India have expressed a willingness to rescue the ailing eurozone from its prolonged financial crisis, but in return would likely want expanded voting share at the IMF, where European nations (EU plus Norway and Switzerland) collectively still hold a hefty 34 percent of the total vote — and the subset of eurozone nations hold 20 percent. Europeans also hold a third of the 24 board seats; eurozone nations Germany and France, as well as Britain, have their own, nonrotating chairs, along with China, Russia, Saudi Arabia, the United States, and Japan, while Belgium, the Netherlands, Italy, and non-eurozone EU member Denmark as well as Switzerland represent groups of countries.
Seen as outsized for a continent in relative decline, Europe’s powers are a long-standing source of resentment for emerging nations. In the wake of the global financial crisis, emerging markets stepped up calls to bring their voting share to par with the advanced countries, and reissued demands for a “merit-based” selection of the Fund’s director, which by tradition has been a European.
After much agonizing, the Europeans did last year concede two board seats and agree to a shift of 6 percent of the Fund’s voting power to emerging nations. Yet to take effect, the reforms would increase the share of China to 6 percent, raising it to the third-most powerful member after the United States and Japan, and just above Germany. India would have 2.6 percent. But the reforms still leave emerging nations short of majority, presaging future power battles. And the United States continues to hold nearly 17 percent of the votes, enough to give Washington a veto over the rare but important decisions that require an 85 percent majority.
Europeans get little sympathy across the Atlantic. The United States — which is fully entitled to its quota share under the current formula — too has long pressed Europe to concede both votes and board chairs to the underrepresented emerging nations. U.S. policy is driven by concerns that emerging markets will become increasingly difficult to work with on international economic policy matters. Washington also worries that instead of growing into responsible stakeholders in global governance, emerging markets will drift away from the Fund and step up self-insurance by accumulating reserves and building substitute regional financial facilities that would diminish the Fund’s influence over its members’ economic policies.
If pooling their votes into a single board seat, the eurozone nations would gain a veto and become a swing vote in the Fund. Armed with such leverage, the bloc’s Western European members, the likeliest losers in further quota reshufflings, could be less reluctant to see some cuts in their voting shares in favor of emerging nations — which, in turn, would attenuate the perpetual tension between Europeans and emerging economies in the Fund.
The prospect of a single seat is not far-fetched given Europe’s increasingly integrated foreign policy and financial regulations, and the eurozone members are inherently unified on exchange rate matters.
But there are headwinds. Europeans are loath to let go of their national pet causes: Germany worries about moral hazard and inflationary effects of IMF loans, France tends to focus on reforms to the global monetary system, and the Netherlands and Nordics stress concessionary finance to the poorest countries. France and Germany are reluctant to give up their own seats on the board, let alone having to negotiate each vote with each other or other Europeans. They also resist losing their national sway vis-à-vis China or Russia.
Intra-European politics too are at play: no European leader wants to pressure his or her counterparts into relinquishing powers, as that could jeopardize subsequent collaboration in European affairs. It is also unclear how the EU members that do not belong in the eurozone would be treated if the eurozone votes were pooled.
The Commission is playing its hand well: if there is good timing for the single seat idea, it is now when Europeans are at their most vulnerable. But Europeans are likely to continue their self-denied claim for power at the Fund. That would not necessarily be bad news: a Fund with two vetoes would unlikely be any more effective — nor would it serve U.S. interests. But it will keep the Fund’s governance evolving as previously, through agonized, incremental reforms.