The establishment of the G20 as ‘the premier forum for our international economic cooperation’ by G20 leaders in Pittsburgh marked a seminal step toward truly global economic governance because of its permanent inclusion of the largest emerging economies. But while the G20 provided invaluable policy coordination during the early crisis response in 2008–09, the ability of the G20 to independently promote substantive improvements in global economic governance during ‘non-crisis periods’ remains questionable.
The inclusion of more countries and the gradual ad-hoc expansion of the G20 agenda to suit the political wishes of rotating presidencies are factors unlikely to produce further tangible advances in global economic governance. In the continued absence of a G20 macroeconomic policy consensus, the grouping seems less and less likely to deliver concrete and verifiable policy actions to support the G20’s own stated foremost goal of strong, sustained and balanced global economic growth. This is largely because its ‘summit format’ and foundation of ‘voluntary cooperation’ lacks any formal obligation for its membership to subject their domestic economic policies to any mutually-agreed global standards.
The lasting substantive global economic governance value of the G20 may be limited to that of a ‘latent forum’ which leaders can activate in times of global economic crises to coordinate an urgently-needed global response.
Acknowledging these accelerating shortcomings, the G20’s principal global economic governance task should be to seek to strengthen the operations of existing capable global economic institutions. In this regard, the G20’s record of utilising the expertise of such institutions as the IMF, World Bank, the Organisation for Economic Co-operation and Development (OECD), and the Financial Stability Board (FSB) is encouraging.
To promote genuine progress in global economic governance through the G20, European policymakers should first and foremost resist the temptation to overburden the G20 topical agenda with subjects of peripheral importance to the central objective of achieving strong, sustained and balanced global economic growth.
Second, European policymakers must push G20 leaders to advance the role of the IMF in global economic governance. Such an expansion of the IMF role ought sensibly to include both additional IMF resources and an enhanced role in domestic policymaking — including in Europe — of IMF surveillance and recommendations.
The global financial crisis reaffirmed the IMF as the systemically most important global financial institution in the world economy. Strengthening the IMF’s institutional role and governance structure is thus of paramount importance. Likewise, given that Europe’s role in this process is vital, a sober assessment of Europe’s strategic long-term interests is critical.
As a declining part of the global economy, Europe must realise that its overarching strategic interest lies in sustaining the global legitimacy of the IMF and other existing global economic governance institutions, thereby shielding them from potential threats from new institutional designs originating outside the traditional G7 countries. Sustaining the legitimacy of such existing global institutions is far more important for Europe’s continuing impact on global economic governance than maintaining its current representation levels in the management of the IMF (and other global economic governance institutions).
It is in Europe’s self interest to expeditiously implement the agreed transfer of part of its IMF voting rights to emerging economies and reduce the European representation on the IMF Executive Board. Europe must also work to further improve the external representation of the euro. In addition, it would be advantageous for Europe, mirroring the ongoing deepening of euro area domestic economic governance, to transition to a single unified and sizable euro area representation on the IMF Executive Board. Such a euro area consolidation effort should sensibly be replicated among the non-euro members of the European Union, leaving Europe in the longer term with a globally credible representation of two vote-heavy seats on the IMF Executive Board.
It is evident that Europe’s interest lies in faithfully establishing an open, merit-based selection process for the top leadership positions at the IMF and other global economic governance institutions. Such a process should be absent of any references to the nationality of the candidate or the principal geographic area of operations of the organisation in question.
The damaging practice of ‘regional rotation’, which is acceptable in the leadership selection for global institutions of limited practical relevance, must not be instituted at organisations such as the IMF that have critical operational roles in the global economy.
Jacob Funk Kirkegaard is a research fellow at the Peterson Institute for International Economics, Washington DC.
This is an adapted version of a testimony to the Public Hearing on Global Economic Governance before the European Parliament Committee on Economic and Monetary Affairs, Brussels, 27 June 2011. The written version of the testimony was first published here by the Peterson Institute for International Economics.