Thursday, November 27, 2008

Analysis on G20 Summit

The following is a translation from Arabic.

1. From 14 to 15 of November the Group of Twenty (G20) met to discuss a variety of issues pertaining to the healthy of the world economy. Before elaborating on what was discussed and concluded, it is important to comprehend some background information.

2. The Global Financial System (GFS) unleashed a series of financial crisis in Mexico (1994-95), Asia (1997-98), Russia (1998), and Argentina (1999). It was in the aftermath of these crises that The G20 (more formally known as the Group of Twenty Finance Ministers and Central Bank Governors) was formally established at the G7 Finance Ministers' meeting on September 26, 1999. The inaugural meeting took place on December 15-16, 1999 in Berlin.

3. G20 is a group that consists of finance ministers and central bank governors from 20 economies. This includes 19 of the world's largest national economies, plus the European Union (EU). Collectively, the G20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population. Full membership of the G20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the US and the EU. In addition, to the financial ministers of these countries, the leaders of the World Bank (WB), International Monetary Fund (IMF) and World Trade Organization (WTO) also attend G20 meetings.

4. The mandate of G20 is to protect the GFS and the economies of the major Western powers by strengthening the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions. G20 works with emerging economies through the IMF, WB and WTO to ensure that these economies are well integrated in the GFS.

5. The Washington meeting was called at the behest of European leaders including France's President Nicholas Sarkozy and UK Prime Minister Gordon Brown. Europe’s leaders have been incensed at the way America allowed the credit crises to spread across the globe. For instance, the US manipulated oil, food and commodity prices to shore up the dollar. Subsequently, the cost of production and inflation soared in Europe; the European Central Bank (ECB) had little choice but to raise interest rates to tackle inflation. As a direct consequence of this policy the EU’s economy started to contract and investors switched from Euros to the Dollars. Investors felt that America’s low interest rates and economic growth was a more favorable investment as compared to the EU. Hence the value of the Euro plummeted and the EU’s economy started to tilt towards recession. Faced with poor growth the ECB was forced to slash interest rates. This further aggravated the value of the euro in comparison to the dollar. Amidst this, Sarkozy and Brown, later to be joined by Merkel and other EU leaders pressed Bush for an international summit to discuss the crisis. Associated Press reported on 5 October, that following an emergency meeting, four members of the G8 - Britain, France, Germany and Italy - “called for an international conference "as soon as possible" to consider sweeping reforms of the global finance system.” At an emergency meeting of the Eurogroup on 12 October, 2008, Prime Minister Gordon Brown presented a proposal to deal with the financial crisis. During a press conference at the 2 day EU summit in Brussels on 15-16 October 2008, European Commission chief Manuel Barosso said there will only be “a global agreement if Europe has a leadership role.” French President Nicolas Sarkozy and European Commission President Jose Manual Baroso visited President George Bush at Camp David on 18 October, 2008. Mr Sakozy said “We have a mandate from the 27 members of the European Union to come here and say first and foremost that this is a worldwide crisis and, therefore, we must find a worldwide solution”. Mr Baroso stated: “The international financial system - its basic principles and regulations and its institutions need reform. We need a new global financial order...This is why Europe wants the calling of an international summit as soon as possible to launch an effective world response to world crisis.” On 21 October, 2008 President Sarkozy told the European Parliament that “Europe must be the standard bearer for the idea of reforming world capitalism.” José Luis Rodriguez Zapatero, the Spanish Prime Minister said, “The EU must take over the leadership of change because that is what it has long been calling for while the US was not favorable…. There has to be regulation and limits to everything to do with incentives and rewards.”

6. EU leaders believe that the cause of the global financial crisis was inadequate regulation of the financial sector, especially in the US. In other words the real culprit behind the global financial crisis in their view is American capitalism. Europe’s leaders would like to see more coordinated action to revive the world economy, both by more interest cuts and more spending by governments to bring countries out of recession. They hope that the meeting will agree a blueprint for future reform, including changes to the international organizations charged with regulating the world economy, such as the International IMF and WB.

Against this backdrop, Bush finally agreed to convene an international summit in Washington from November 14 to November 15.

But From the outset the meeting of the G20 was not going to produce anything substantive, apart from agreement on lofty goals and general principles. These were mentioned in a fact sheet issued by the Whitehouse after the summit.

Goals

1. Reached a common understanding of the root causes of the global crisis
2. Reviewed actions countries have taken and will take to address the immediate crisis and strengthen growth
3. Agreed on common principles for reforming our financial markets
4. Launched an action plan to implement those principles and asked ministers to develop further specific recommendations that will be reviewed by leaders at a subsequent summit
5. Reaffirmed their commitment to free market principles

Principles

1. Strengthening transparency and accountability by enhancing required disclosure on complex financial products;
2. Enhancing sound regulation by ensuring strong oversight of credit rating agencies; prudent risk management;
3. Promoting integrity in financial markets by preventing market manipulation and fraud, helping avoid conflicts of interest
4. Reinforcing international cooperation by making national laws and regulations more consistent and encouraging regulators to enhance their coordination and cooperation across all segments of financial markets
5. Reforming international financial institutions (IFIs) by modernizing their governance and membership

The reason for a lack of consensus on detail solutions amongst EU, US and UK leaders at the summit is as follows:-

First, President George Bush does not possess the domestic clout or international legitimacy to carry out a comprehensive reform of the GFS. Besides, Bush is a lame duck president and leaders of many countries are waiting for president elect Obama to take office before seriously considering all the proposals on the table. Hence that is why George Bush launched a passionate defense of the free market on the eve of the summit, as he aimed to deflect European criticism about American capitalism. “While reforms in the financial sector are essential, the long-term solution to today's problems is sustained economic growth,” he told an audience in New York. "And the surest path to that growth is free markets and free people.” So the best George Bush could do was get consensus agreement on the free market (see goal nos. 5) which he did. The rest is left to his successor Obama to pursue.

Second, prior to the G20 meeting, some EU leaders had urged a complete rethink of the Bretton Woods agreement in 1944 that created the post-war system of fixed exchange rates and established the IMF and the World Bank. German Chancellor Angela Merkel and French President Nicolas Sarkozy said “Bretton Woods II” should bring about “genuine, all-encompassing reform of the international financial system”. On October 13, 2008, British Prime Minister Gordon Brown said world leaders must meet to agree to a new economic system. “We must have a new Bretton Woods, building a new international financial architecture for the years ahead.”

However, Brown's approach is quite different than the original Bretton Woods System. Britain wants to carry on emphasizing the continuation of globalization and free trade and is opposed to a return to fixed exchange rates. Sarkozy disagrees with Brown and argues that the "Anglo-Saxon" model of unrestrained markets has failed. He is supported by Italian Economics Minister Giulio Tremonti has said that Italy will use its 2009 G7 chairmanship to push for a "New Bretton Woods.

Europe’s view is diametrically opposed to America’s view on Bretton Woods, as America does not want to cede control of IMF, WB and WTO. Moreover, America possesses very little appetite to abandon the world of floating exchange rates, as it has given Wall Street complete reign over the world markets. Britain is keen to pursue free trade but is looking to acquire greater control over the international financial institutions and also wants America to regulate its corporate masters who have hitherto escaped punishment.

Because of these two factors the G20 could only agree on goals and principles. This was acknowledged by several leaders, as being the first step in the reform GFS. Future meetings of the G20 and other forums will decide what will become of the GFS.

19 Zull-qedaa 1429
17-Nov-2008

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