The G20 Summit - What to Make of it?

Posted by Fredrik Erixon

I have not made up my mind yet what to think about the result of the G20 summit. True, it was a great photo-op, but I think there were some good news coming from London late last week. However, they were few, wildly exaggerated and had been in the making for quite some time. But my feeling of goodwill has perhaps more to do with the fact that all the naïve, hyperbole beliefs in G20 global economic governance fell flat on the ground. We did not see anything of “global fiscal stimulus co-ordination” or global attempts at “fixing the banks”. Nor did they G20 leaders claim they had built a new Bretton Woods structure or “civilized the raw nature of capitalism”, which was president Sarkozy’s ambition for the summit. In contrast to this positive account stands the failed effort to do anything meaningful on emerging protectionism and trade policy.
I think it is important that the IMF has been promised more resources. There are quite a number of emerging markets on the brink of defaults – for the banks or the country as a whole – and there is practically no other alternative available than to bail them out. I have been critical of the use of the bailout instrument in the recent past, and remains so today. But at a time of worldwide financial crisis you can’t just bailout banks in the advanced economies and leave the financial system in emerging markets to collapse. The bailout instruments need to be reformed, but such reforms must come after broader and deeper reforms of the financial system which makes the banks truly private entities or public utilities. In the current regulatory system, you don’t have any other alternative than to bail out financial firms. Beefing up the resources of the IMF was important in that regard: financial markets do not have to take positions accounting for emerging market collapses just because the only kid on the block who could bail them out doesn’t have the resources to do it. Current IMF resources – around 250 bn USD – are tied up in recent bailouts; the new money (probably less than what the G20 communiqué says) will give the IMF some new room for action. This new discretion (especially the new allocation of SDR drawing rights) must, however, be monitored closely by outside parties. The IMF is sometimes all too happy to issue credit (it would not exist if it did not lend money to countries). With a French interventionist at the helm of the Fund, and with bailout-Larry in the White House, there is an even stronger case for close monitoring to ensure the IMF is not using the new support for excessive interventions and lending.
The G20 language on protectionism and trade is appalling. The G20 could have made a significant effort to prevent emerging protectionism from escalating; there is a clear danger that protectionism will increase as the global economy continues to deteriorate (although at a slower pace than in Q4 and Q1) and as the fiscal expansion have little effect. Remember, the most appalling bailouts of automotive firms have so far not been taken. But the G20 only did a few lip-service statements about the need to keep markets open and avoid protectionism. They did not specify what this means (can WTO authorized protectionism be imposed?) and this is probably not an unintended mistake. If governments were really, really serious about avoiding protectionism, commitments would have been more precise and there would have been a process to ensure compliance. Now the communiqué only causes confusion and will not prevent any country from imposing new protectionist policies.