World leaders will gather in France November 3 and 4 for the G20 summit, where the agenda is likely to focus on stabilizing the global economy and the eurozone crisis.
Carnegie hosted a media conference call with Moisés Naím and Uri Dadush on the G20's role in the global economy and the potential impact of the summit.
TOM CARVER: Good morning, everyone. This is Tom Carver. I’m a vice president of communications at Carnegie Endowment, and you have joined a media conference call with Uri Dadush, the director of our international economics program, and Moisés Naím, who is a senior associate at the program and columnist for El Pais.
This call is about the upcoming G-20 on Thursday and Friday in France – what are the implications of it and what do we expect to get out of it. So the call will last for half an hour, and is completely on the record.
Moisés is joining us momentarily, but we have Uri here already. So maybe we could just start, Uri – Uri, you had some interesting comments this morning in the Financial Times about the currency issue and Japan’s control of the yen in advance of the G-20. What do you think is going to be top of mind for the – for the G-20? Is it – is it the euro, or is it currency issues? Maybe you could just walk us through what you think will be foremost.
URI DADUSH: Well, the eurocrisis is going to be front of – front and center of this meeting. And I’d like to say a word about it in a moment. But just to backtrack a second and remind ourselves of the three French priorities that were set about a year ago: Each of these priorities, while important, are actually going to play a completely secondary role in the – in the discussion.
Just to remind you, the three priorities were going to be reform of the international monetary system, which will probably be reduced to a call for more exchange-rate flexibility – no major initiative there; the second French priority was going to be food prices, what to do about high food prices and unstable food prices – there, too, the expectation is the – it will be mainly exhortations, that none of the tough issues like agricultural reform or ethanol subsidies that are very much at the heart of the problem are going to be touched; and the third French priority was going to be G-20 governance. And there, there is very unlikely to be any discussion of changing membership or anything like that that’s far too sensitive.
But there will be some discussion of instituting a permanent secretariat where opinions are very divided, with the United States against it, as they usually are on secretariats, and – but several other countries in favor. So it’ll be interesting – including, I suspect, France. So it’ll be interesting to see whether they decide to establish some kind of permanent body in support of the – of the G-20. So that’s as far as the ostensible –
MR. CARVER: The official – (inaudible) –
MR. DADUSH: – the official priorities are. Now, let’s get to the meat: Two issues will dominate, one being – the first one, and far more important – the eurocrisis. The second one is the continuing discussion on global rebalancing. OK?
Let me, again, take it in inverse order. Let me – let me just quickly say a word about global rebalancing. This, of course, is the big United States’ agenda – has been for years, and basically the argument is, the United States has to get its fiscal house in orders; it has to reduce its spending. And so the rest of the world has to pick this up.
The U.S. is in extraordinarily weak position to push this agenda hard at present, in part because the internal divisions over its budget policy, et cetera – the theater over the – over the debt limit – has really undermined its authority, but also because on the other side of the ledger is China, which actually has continued to grow at a very rapid rate, to contribute to global demand, and is now in an even stronger position partly because it is being wooed by the Europeans. So it’s very difficult for the Europeans on the one hand to ask for money, and on the other hand to put enormous pressure on China to change its policies – and partly because there is so much risk out there in people’s perceptions that, in fact, emerging markets are worried about their exchange rates depreciating, not appreciating. So they are putting much less pressure on the Chinese in support of the United States’ position.
So expect very little out of the global rebalancing agenda as we have in the last two or three summits.
And last but not least, let me come to the most important topic, which is the eurocrisis. And here, Europe has been looking very hard for support from China and other emerging markets who are being asked to invest in their various – in the – in a special-purpose vehicle that is associated with the European Financial Stability Facility in support of the – of the fund that is supposed to be the firewall against the crisis spreading further, particularly hitting potentially Italy and Spain.
And the bottom line here is that the Europeans are very unlikely to be getting much out of – out of the meeting. I have no doubt that they’ll get expressions of support, and they may even get some spare change. Basically, they need trillions of dollars in this fund. I have estimated that the cost of bailing out Italy and Spain could be $2.1 trillion. So they may get, you know, tens of billions of dollars here and there from the Chinese, the Russians and the Brazilians, who will make a show of being in support.
But they’re very unlikely to get what they need in a significant way. They’re very likely – unlikely to get a big expansion, for example, of IMF resources that might support their activity. And this is essentially for two reasons – and here I’m finishing – first, because Europeans did not put their money where their mouth is – OK, they’re basically telling the Chinese and others, do what I say, don’t do what I do. They have essentially given very, very little additional – actually, no new money to EFSF at their recent summit.
And the second reason is that the United States anyway is going to be opposed to a large expansion – to an expansion of IMF resources; bear in mind that the United States has not yet approved the quota increase that they had committed to during the crisis expansion of the IMF a couple of years ago. And people don’t expect this quota increase, approval of expansion of IMF resources, and U.S. contribution to happen before the coming elections. So United States ¬– in the – (inaudible) – will oppose further expansion of IMF resources.
MR. CARVER: OK.
MR. DADUSH: All right. So that’s where we are.
MR. CARVER: Moisés, Uri was just talking about the issue of kind of global governance and you know, just (the ?) very unlikely – (inaudible) – of the G-20 to bail out the euro in any substantive way. But do you see the G-20 as becoming, nonetheless, more and more important as the core place where these issues are discussed?
MOISÉS NAÍM: Yes. The answer to that, I – in order to answer that, I would like to read a communique of the G-20. And among the item –
MR. CARVER: Hopefully not the whole thing. (Chuckles.)
MR. NAÍM: No, I – just – just highlighting four bullet points that they have in the communique – that is, strengthening transparency and accountability in financial institutions; enhancing sound regulations; promoting integrity of financial markets; and reinforcing international cooperations. This is the communique agreed in London in November of 2008. And we will see very similar language today.
And what this means is that the G-20 has – is well aware that we have entered in an era of metrics and scrutiny, and they are oblivious to metrics and scrutiny when drafting their communiques and their decisions. It is quite amazing to see the pledges and the promises and the pledges of money that have not been – that have not materialized, pledges and promises of changed behavior that we have not seen, promises of reforms that have gone only half way and so on. So that’s the backdrop and the background to all of this.
One point that I wanted to stress to complement Uri’s point is about the financial – the financial sector and there, there are two issues that are quite important: One is how to treat banks and the link between the value, you know, of the sovereign debts and the capital requirements of the banks and their – and the new – the new conditions, the new regulations on bank adequacy, solvency and all of that, and that’s going to be very important. It is already happening outside the G-20, but it’s going to become part of that as they want to globalize it and bring the kind of European-like conditions and reforms of the financial system, and trying to make them more widespread and have Basel III being adopted more widely.
And then there is going to be one of the most contentious issues, is the different ways of looking at the Tobin tax. So Europe and especially President Sarkozy and others are proposing a tax on financial transactions. The United States instead is thinking and is not agreeing with that, but proposing instead a tax on banking liabilities that will be deter them off of growing in ways that are imprudent. That, I think, is going to be one of the areas where we are going to see some fireworks and some discrepancies between the participants.
While all of that is happening, there will be wild shifts – swings, both in currencies and in bonds, that are going to somehow color the nature of the conversations.
MR. CARVER: OK. OK, well let’s just pause and see if there are any questions. Anyone wants to jump in?
Q: Hello?
MR. CARVER: Yeah, hi.
Q (Journalist 1): I just wanted to throw – (inaudible) – I mean you both – (inaudible) – and there’s a sort of this – struck on this, but, you know, I’m just looking at the – of the idea of a G-20 as this coordinated body being out – (inaudible) – and seeing, you know, Japan sort of go off on its own currency intervention without really any regard to the sensibilities of the – of the – of the – of the group meeting this week. And then, you know, in the case of Europe, I know Greece obviously is not part of the G-20, but the fact that they could all be just caught so unawares by Papandreou’s moves seems to suggest that they’re – they really didn’t have control of their own agenda coming into this. (I mean ?), the European Union is represented at the G-20 more broadly as are many of the – of the different countries. So, I mean, is it safe to say that this – that this organization is not really living up to its – living up to its billing?
MR. CARVER: Uri?
MR. DADUSH: Well, yeah, the yen intervention is indeed unfortunate as it occurred in these days. It is the direct result, in my view, of the – of the disappointment, which is now evident in the markets. You know, we’ve lost all of the gains we had post-Brussels summit. The disappointment with the – with the outcome of the Brussels summit and the increased risk perceptions in the system, the yen is viewed, correctly or incorrectly, as the last of the safe haven currencies now that the Swiss Bank has put a ceiling.
The – so the – Papandreou referendum also seemed to come out of the blues; there was no anticipation of this. I certainly hadn’t heard about it in the – in the run-up to the crisis. Now, from there to say that the G-20’s therefore, you know, ineffectual, et cetera, I think makes the presumption that somehow this is the committee that runs the world and, of course, it is not, Howard, as you – as you know.
This is essentially – look at it as a kind of nonexecutive board of directors that gets together from time to time – actually only once a year now – to agree broad approaches and strategies. They are at their worst when they are trying to delve into details or to provide, you know – or to make it look like they’re taking decisions for the world.
And so, I think it’s important to set a bar that is realistic and to realize that while, you know, often we’re disappointed by it in terms of concrete action, nevertheless this is a big step forward compared to a G-7 meeting where – (chuckles) – where now today arguably, you know, the three or four most economies in the – in the world, together with the United States – like China, India, Brazil – are not even at the table.
MR. NAÍM: While it’s a step forward compared to the G-7 or G-8, it’s a step backward compared to the G-20 of 2008. In 2008, the G-20 revitalized – energized G-20 provided signaling in terms that there was someone in charge. (Inaudible) – you know, in 2008, the world was panicking, and the feeling was that the meltdown was everywhere, and so it was that meeting – and they just pulled that – an institution that was a 1990s creation that had been dormant – it was reenergized and, at that moment, it provided a very strong sense that indeed it was the committee that run(s) the world (even ?) if that was neither the intention nor the design or the structure nor the capability of the institution, but the world felt that there was someone in charge. And that was very important.
And that – after that meeting – and that’s why I started by reading the communique of that 2008 summit – it has been declining. Every single G-20 meeting has been less impactful than the prior one.
(MR. CARVER ?): Why? Why is that, do you think?
MR. NAÍM: Because they think – the sense of emergency has dwindled, the differences of the participants have emerged, and the capacity of different actors to really be part of the solution and not part of the problem has also declined.
MR. CARVER: OK. Great, any other questions?
Q (Journalist 2): Yeah, hi, Picking up on that theme, what did the G-20 do this week to restore some level of confidence in the global economy?
MR. DADUSH: Well, there are lot of things they could do; they’re just not going to do it. But what they could be doing is, for example, as I have argued, agree to add $1 trillion to the IMF’s resources and also mandate the Europeans, which is not going to happen, to put in a similar amount of money into the EFSF.
I’m quoting those numbers – the $2 trillion – because that is roughly what is needed should Italy and Spain need a bailout of similar magnitude to that of Portugal, Greece and Ireland, which I think is, you know, is a very serious possibility going forward.
They could also have a much better articulated agreement with respect to, you know – demands reporting policies in those countries which can afford to do it. So who are those countries? Demand acceleration and support policies are possible in Germany; they are possible in some of the other countries in the European periphery that are strong – the Netherlands, Austria – these are relatively small players. China could probably do a little bit more, and some of the – you know, so there are one or two others. But I would say that the second set of agenda items that I’m talking about would be much less important than the first, so the strengthening of the European bailout.
And then the other thing that they could be doing, which would have a significant – is a long-term effect on real activity, but a significant effect on business confidence in the short term, would be in fact to agree on the big structural reforms.
So if they were to make a really convincing push for a conclusion of the Doha deal and a really convincing push for global banking and financial regulations that apply across the board, I think this would be seen as a big boost to – this would boost confidence in the business community, would give them a sense that we’re moving in the right direction; there’s – there’s somebody in charge.
But again, all of this is very unlikely to happen. This is a wish list at the moment. The political stars are not aligned.
MR. NAÍM: The bystanders – one important signal that this meeting can send that, I agree with Uri, is not likely to happen, is for surplus countries that have been bystanders in the European crisis, take a more active role. And concretely, I’m thinking about China, of course, and Brazil and perhaps even India and others that can add to the resources that are available.
And one of the things that – the perceptions that need to be fought is that they agreed – the Brussels agreement does not generate enough resources, that the 1.3 trillion euros that are available are not going to be sufficient. And what we’re seeing in the markets, the move to the yen, all the safe havens and what’s – we are – what’s happening to the yield and to the bonds of European periphery countries is just a reflection of the fact that markets are – the notion is being, sadly, that the money is not going to be enough. So it’s very important that the countries where the money is send signals that they are willing to participate in strengthening the European recovery and stabilization.
MR. CARVER: OK. Any other questions?
One thought I had is whether – I mean, you talk about the communiques of G-20. That’s the – obviously, the kind of outward face of the G-20. But is there a value in the – of the G-20 of just having these key players meet for two days and the – you know, the behind-the-scenes relationships and discussions that go on? Or is there less to that than meets the eye?
MR. DADUSH: Oh, I think that, in many ways, that is the most valuable – well, I don’t know about the most valuable, but it’s a very valuable part of the process. You have to realize that these countries that are part of the G-20 are extraordinarily diverse. They have very different levels of income. They have very different institutional capacity. There are, of course, very different governance systems.
MR. CARVER: And very different priorities.
MR. DADUSH: And therefore, very different priorities and very different perceptions about the world.
So, an important part of international coordination – as of coordination, of course, any other group – is for people to understand where each other is coming from. And I think, in this sense, the G-20 plays an invaluable role compared to, you know, again, the G-7s that – (chuckles) – which excluded, you know, a huge part of the global economy. You know, six out of seven billion people were not part of this – were not represented at this gathering. Here, you have the main players. You have the larger, most dynamic economies at the table. And they are working together in a large number of areas and working parties – enormous amount of preparation goes on – where, even if the outcome at the end doesn’t satisfy us, nevertheless, the process of exchange and understanding each other, it’s at – I think is very valuable, very important.
MR. NAÍM: I agree that it’s important, but it’s important for some elites and for some people that follow these (quite ?) – and this is inside baseball. For the world at large, what it – what this is is another meeting of heads of state that are not solving the problem of the millions of people that are unemployed. And so there is a value – I agree with Uri that there is a lot of value, both in terms of the preparation that happens and through the bureaucracies and the different agencies to work in sync, trying to generate very concrete results, or the coordinating effect of announcing a summit is very good in terms of making – you know, forcing bureaucracies to coordinate and work and focus. But at the same time, the negative part is that there is this summit that they would – the most powerful people in the world meet and nothing happens. And that has very bad political consequences and it also has consequences for the markets.
MR. CARVER: Any other questions? We got three or four more minutes left.
What about the relationship of, you know, organizations like the ECB? I mean, they’re about to get a new chief; tomorrow, I think it is.
MR. DADUSH: Today, actually.
MR. CARVER: Oh, it’s today?
MR. DADUSH: (Inaudible) – November 1st, yeah.
MR. CARVER: So, I mean, does the ECB have observer status at G-20? I mean, how do they – are they allowed there? Do they – are they in the discussions?
MR. DADUSH: I – they definitely have observer status at the – at the finance ministers’ meeting, which is one level below. I’m not sure that they have observer status even at the – although they’re there – at the – at the summit.
But clearly, you’re right to point to (your ?) ECB, because – I mean, not to put too fine a point on it, Tom – it’s what stands between Europe and total disaster today, because the net effect of not having put sufficient funds into the FSF is that it’s the ECB that is essentially buying Italian government bonds and Spanish government bonds to prevent a yield going to levels where markets completely lose confidence.
So the ECB continues to play that role; it does so very reluctantly because fundamentally, it is taking the place – it is abrogating the sovereignty and the institutions that should be taking these decisions, which are the governments of the various – of the various countries, at the risk, in the long run, of debasing the currency.
So the ECB actually, today, is probably the single most important institution in terms of assuring global economic stability going forward, a goal it has not sought.
MR. CARVER: And we talked – I mean, I think you touched on it, Moisés, but, I mean, you know, there’s obviously a huge amount of discussion with Occupy Wall Street and these other demonstrations about fairness and inequality. I mean, are those issues that are going to come up at all at G-20?
MR. NAÍM: Yes. And it’s going to be a very important part of the agenda. They invited the L-20, which is – these are labor leaders for 20 – for the 20 countries. Each country selected a group of leaders – labor union, trade union leaders. And the head of the ILO, the International Labor Organization, is going to be there. And so the – they’re going to tackle the issue through the unemployment and the youth unemployment situation. That is going to be a very, I think, important part of the conversations.
MR. CARVER: OK, great. Are there any other final questions or comments for Uri or Moisés? This will, of course, be the first G-20, I guess, for Christine Lagarde. Do you expect her to have a prominent role?
MR. DADUSH: Yes I do. And we may be surprised by this meeting. I have been surprised by the fact that the IMF has, so far, played a very low-profile role in the run-up the Brussels summit, and in the – in the subsequent there’s very little reference to the IMF. Yet, it is clear that any big international initiative will likely go through the IMF.
And the fact you’re not hearing about it, I think, either means that there are a lot of negotiations going on behind the scenes or that – which is possible – or that the IMF is simply not in a position now to play a significant role. So if there is going to be a surprise, it may be in some statement about the IMF. But, as I said at the beginning, I think the probability is low.
MR. NAÍM: The – you asked about Christine Lagarde’s role in this G-20. And I want to recall and recognize the fact that in the summer, in her important speech in Jackson Hole, she called attention to the issue of banks and the need to capitalize them and the dangers of having an undercapitalized financial system. At the time, that comment was widely derided, and there was, you know, very strong reactions about – against that point made by Europeans, and some very notable Europeans.
And yet, we are now recognizing – everybody is now recognizing that she was right. That is an important issue – that it’s – that these two things are connected, and that Europe cannot deal with its sovereign debt without dealing with the banks; and the banks – and vice-versa. So it’s going – and that is a preamble to her appearance in this meeting. And – but she’s not the only one – that this is not going to be her first G-20. She of course, attended prior G-20s, as a finance minister of France. But now, she’s – in her capacity as the IMF managing director, is the first time.
But there are – and perhaps to end on a lighter – and I don’t know how much lighter or darker – note, the other person that this is going to be the first G-20 meeting for is Teodoro Obiang, from – the dictator of Equatorial Guinea, who is a special guest to this G-20. At the same time that the United States has initiated some money laundering persecution of his son, Teodoro Obiang, Jr. So it’s going to – this is a lighter note that has nothing to do with the large macro-prudential and macroeconomic conditions in the world and instability. But it goes to show what are the kinds of issues that –
MR. CARVER: Hang on, you can’t just throw that out there – I mean, why is he coming to the G-20? Equatorial Guinea must be the 180th largest economy or something, right?
MR. NAÍM: Yeah. And the paradox, that is one of the lowest-growing countries – if you have the list of which are the countries that are coming to the G-20 that have the lowest economic growth? They are France, Italy, UK, Spain, and Equatorial Guinea. And he’s invited because there is a center of theme on Africa. Meles Zenawi from Ethiopia is coming – invited. And from the United Arab Emirates we have Khalifa bin Zayed Al Nahyan, the leader of the UAE. And so you have the participants – the official participants of the G-20, and then you have invited countries. The invited countries this time around are Ethiopia, Singapore, Spain, the United Arab Emirates and – (inaudible) –
MR. CARVER: Equatorial Guinea
MR. NAÍM: – and Equatorial Guinea.
MR. CARVER: Well, I can’t see that there’s going to be a huge amount of time for discussion on Africa, but anyway. Thank you both very much. We’re up on time, at 10:30. Just to remind everyone, this was on the record. If you – Carnegie will post a transcript in the next couple of hours. And if you have any questions, don’t hesitate to email, or if you want any follow-up questions. But thank you for joining, and we now end the media call on the G-20.
MR. DADUSH: Thank you.
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