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Prospects for the G20 Cannes Summit

John Kirton, G20 Research Group

At their sixth summit, the G20 members must rise to the challenges that face the global economy today, from the slowdown in growth to the escalating financial crises in the United States and Europe that threaten the world as a whole

From "The G20 Cannes Summit 2011: A New Way Forward," edited by John Kirton and Madeline Koch,
published by Newsdesk Media Group and the G20 Research Group, 2011
To download a low-resolution pdf, click here.

At their sixth summit, the G20 members must rise to the challenges that face the global economy today, from the slowdown in growth to the escalating financial crises in the United States and Europe that threaten the world as a whole

The sixth G20 summit, taking place in Cannes, promises to be unusually significant. It must confront and control a new prospective global financial and economic crisis, arising first in a Japan struck by both natural and nuclear disasters in March and then in the United States with its sovereign debt downgrade, and now extending to Europe with doubts about sovereign debt in Greece, Spain, Italy and France and a Franco-Belgian bank gone bust.

The summit must simultaneously counter the rapid slowdown in global economic growth that helped caused these financial crises and that will compound their negative effects; it must also address its broad, ambitious, built-in agenda, starting by strengthening financial regulation and supervision for banks and for globally systemic financial institutions now under stress, and inventing new instruments and increasing resources for the International Monetary Fund (IMF) to contain the contagious global financial and economic crisis with which regional organisations alone, led by the formidable European Union, cannot cope. It must advance the three priorities defined in August 2010 by French president Nicolas Sarkozy as the Cannes Summit chair and host: modernising the internal monetary system beyond its heavy reliance on the US dollar, calming volatile commodity markets and improving global governance within the G20 itself, as well as in the United Nations galaxy. The Cannes Summit may also be called on to address newly erupting crises and opportunities, such as reconstructing a reforming North Africa and Middle East and controlling the terrorism that undemocratic regimes in the region breed.

Responding to adversity

The Cannes Summit will probably rise to these challenges to produce a summit of substantial and sufficient success. It will do so above all in its classic mission of crisis response to the new financial and economic shocks erupting on its eve in its European home, by authorising a confidence-creating, coordinated action plan for growth, centred on credible medium-term fiscal consolidation combined with short-term stimulus, stronger financial regulation and supervision, and new responsibilities and resources for the IMF.

The success of Cannes as a classic ‘back-to-basics’ crisis-response summit will be driven above all by the very severe, sustained and somewhat familiar shocks erupting on the summit’s eve. Further spurs for success will come in the inability of the EU and IMF to cope on their own, the rising capabilities of emerging G20 members now ready to assist, the deep domestic attachment of all members to economic, social and political stability and openness, a highly experienced, energetic, ambitious, committed chair surrounded by like-minded G20 summit veterans, and the interpersonal bonds formed among those meeting for the sixth time in three years to confront and conquer global financial and economic crises such as this.

The defining challenge and likely standout success of Cannes will be to contain the growing global financial crisis and the accompanying plunge in economic growth. Equipped with the Framework for Strong, Sustainable and Balanced Growth and the Mutual Assessment Process (MAP) to help put it into effect, G20 members will move to design and implement a coordinated action plan for global growth, containing immediate measures and those that follow in the short and medium term. The plan will blend monetary, fiscal and direct financial support measures, give a green light for emerging G20 members as well as a few advanced members to stimulate, and have most advanced members, led by the US, credibly commit to comply with the fiscal consolidation by 2013 that they promised at the G20 Toronto Summit in June 2010.

In its content and in its clarity and in the G20 members’ commitment to greater macroeconomic policy coordination, this action plan should create the confidence necessary for investors to lend and consumers to spend, and even encourage the US Congress and legislatures in Europe and Japan to make unprecedented adjustments for the greater G20 and global good. The recollection of the great recession and great rescue by the G20 from 2008 to 2010 and the reality of the current crisis are so strong that the Cannes leaders will be forced to expand on their proclamation at their 2009 Pittsburgh Summit to make the G20 the permanent priority forum for their international economic cooperation, a forum on which the global community as a whole now depends.

A second equally significant, if less spectacular, success will come through strengthening financial regulation and supervision. In the face of intense market concerns about the inadequate capital held by European banks as a buffer against their sovereign bonds that might go bad and their loans that might sour as their own and partners’ economies slow, stagnate or shrink, G20 leaders will agree on the faithful implementation of the Seoul commitment to strengthen bank capital, the conduct of more convincing, internationally consistent stress tests, the imposition of rules for globally significant financial institutions that can expand as the contagious threat to global financial stability does, and the raising of the capital required by embattled banks that see their value shrink and their liquidity dry up. A key immediate accomplishment will be assisting beleaguered countries bolster their international payments balances, bondholders, budgets and banks.

A third success will come from moves to strengthen the responsibilities and resources of the IMF. Since the start of the eurocrisis in the spring of 2010, IMF resources have backed those of the European Union in the rescue packages for Greece, Ireland, Portugal and, once again, Greece. Much more will be needed to convince markets that governments with enough available money, including the leading emerging countries in the G20, will be there to back Spain, Italy, France and the euro itself, should the need arise. One possibility would be to assemble a ready reserve in advance, a second line of defence at the IMF on which embattled governments could draw to assist their besieged international payment balances, bondholders, budgets and banks. Another would be to build on the London Summit’s success with another allocation of special drawing rights (SDRs), perhaps backed by more currencies than before. This would allow France to claim some success on its presidential priority of moving the international monetary system off its singular reliance on the US dollar, to give rising powers a greater share of the rights and responsibilities they now deserve.

A fourth advance will come on the French priority of commodities. Leaders will avoid the over-regulation of derivatives markets, and instead launch the much more food-friendly Agricultural Market Information System, or AMIS, to enhance market transparency, reduce fear-driven hoarding and protectionism at times of perceived shortages, and foster humanitarian food relief for the very poor.

Taking a back seat, but being nudged ahead, will be most issues that have generated the disputes and drama at G20 summits past. One is a global bank levy or international transaction tax that is tempting for cash-strapped, austerity-minded European governments, but resisted by the majority of G20 members, whose financial institutions behaved well during the shocks of the past several years. On the menu of innovative finance options that Bill Gates will bring to G20 leaders to back the provision of badly needed public goods when the budgets for official development assistance are under growing strain, the double-strength options of taxes on alcohol, tobacco or climate-unfriendly transportation will have greater appeal.

A second, now less central, issue is China’s undervalued exchange rate. China, sensitive to increasing inflation and social instability at home, is rationally allowing the renminbi to rise against the US dollar and other currencies abroad. Further flexibility by China and others on this issue within the framework and the MAP is the sensible solution.

A third issue with a reduced profile is last year’s allegation of ‘currency wars’ brought by new American quantitative easing and emerging countries’ capital controls in response. Also on the back burner will be such summit perennials as getting the badly overdue Doha round of multilateral trade liberalisation negotiations finally done, even as leaders try to make the December ministerial meeting of the World Trade Organization a success. Similarly, giving climate-change control the boost it needs as the end of the Kyoto Protocol commitment period and the Rio+20 summit in 2012, as well as improving global governance, are due for modest advances at best.

In the same category stands serious efforts to deliver the G20’s impressive commitment at its 2009 Pittsburgh Summit to rationalise and phase out inefficient fossil-fuel subsidies in the medium term – a move that would produce major advances in reducing, simultaneously, fiscal deficits, carbon emissions and harm to human health.

In the area of strengthening G20 governance, France’s plan to spread the burden of an ever-expanding

The trading floor of the New York Stock Exchange. Reform and regulation of the world’s markets will continue to be among the subjects discussed at the Cannes Summit agenda over its full year as chair by adding several more ministerial meetings has paid off most clearly in the contribution of the G20 agricultural ministers’ meeting to the food security advances. However, the current global financial and economic crisis gathering force since the spring suggests that the value of preparing for the possibility of returning to the G20 summit’s tradition set at its start of holding two summits a year.

Demand for an additional summit

The intention of the next host, Mexico, to hold its G20 summit in June 2012 opens up the option of a further gathering in the autumn. The long-standing desire of Russia and Turkey to host the 2012 summit suggests there would be sufficient supply of this critical component of G20 governance to meet the clear demand. No G20 secretariat of any form could substitute for this critical value of the leaders themselves taking personal ongoing charge of the design and delivery of G20 governance that the world so badly needs.

To strengthen global governance beyond the G20, the Cannes Summit should bolster the authority and resources of the Financial Stability Board – a badly needed step towards making this body as strong a pillar in its area of the international financial institutional firmament as the IMF is in its field. Bolder, broader advances initially proposed by France as chair, such as reforming the United Nations Security Council, will have to wait for another day.

Despite such second-level disappointments, by acting as a coordinated club to contain the current financial crisis, revive slowing economic growth and strengthen financial regulation and supervision, the G20 Cannes Summit will give ever more life to the ambitious promise that the Pittsburgh leaders proclaimed of making the G20 the permanent, premier forum for its members’ international cooperation and, now, in its impact for the global community as a whole.

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