It’s been a scary few days in world politics and for the world economy. ‘We are looking straight into the face of a great depression’, declared Simon Johnson, former chief economist of the IMF, or at least a ‘financial storm’, according to British Prime Minister David Cameron.
Spinning out of control from the crisis in Greece, the politics of the fraught and the exhausted had taken over and it was time for calm, hard heads to explain where the euro stopped. If the rescue package were rejected, Greece would be out of the Union and there would be no funding, German Chancellor Angela Merkel and French President Nicolas Sarkozy made clear. That was the first step in stopping the rout. Europe’s recovery strategy was back on the table. While Europe still has a long way to go — and it will take at least three to five years to get there — the beginnings of a way forward have been put in place at Cannes.
Europe, as the White House doesn’t tire of saying, has to sort out its own problems. And the heart of the problem is European, not global. Specifically, the euro zone needs to address the underlying structure of its fiscal system. Europe needs a proper fiscal union, and the ability of member governments to issue new debt must be severely curtailed.
But Europe’s (even Greece’s) problems are now everyone’s problems. How else would it be politically tenable to expect that Chinese peasants should contribute to propping up European welfare systems and indulgent lifestyles? Responding to Europe’s problems was core business at Cannes. Important initiatives included the proposal to boost IMF resources for dealing with bailouts, of which Australian Prime Minister Julia Gillard was a, properly, active proponent, despite American reluctance. They also included proposals to bolster the European Financial Stability Facility (EFSF), the mechanism for bankrolling European bad debt and an Australian plan to go forward around the Doha logjam on WTO reform.
On the EFSF, European expectations of China’s stepping into the breach were high. Yet, the People’s Bank of China international department chief, Zhang Tao, made it clear in the lead up to the summit that China has ‘confidence’ in the European market, and it was not about to provide a blank cheque to the EFSF. Foreign exchange management in China is based on ‘the principle of safety, liquidity and adding value’, Zhang said. Vice Finance Minister Zhu Guangyao, said, at the same time, it was ‘too soon’ for China to discuss further bond purchases from Europe’s revamped rescue fund.
This week’s lead essay, from Sourabh Gupta, provides a cool-headed appraisal of how, for China, ‘with the euro zone in deep distress, and with the euro along with the dollar comprising 90 per cent of globally allocated foreign exchange reserves, there is only so much safety to be had’. Extricating itself from this reserve management predicament is driving China’s currency internationalisation strategy, as Gupta argues.
Going forward, an international monetary system that is characterised by a paucity of global reserve assets and is overly dependent on an insufficiently credible dollar as its sole monetary anchor will stand little chance of surviving in a world of free capital flows, Gupta explains. ‘Equally, a future global multicurrency order characterised by hybrid exchange rate regimes and free capital mobility, yet backed by only a weak and fragmented governance structure, will repeatedly be trumped by narrow and domestically generated protectionist compulsions. Hence building flexibility and capacity within the international monetary system’s regulatory mechanism to accommodate — and accelerate — the financial liberalisation trajectories of its rising stakeholders, most notably China, is the foremost medium-term priority of the day. This is the context in which novel ideas that advocate acceptance and use of emerging market currency-denominated instruments as reserve assets, such as the issuance of emerging market GDP-linked bonds, and other forms of pooling and securitisation of emerging market debt into composite assets, as well as a significant expansion in size and share of large, dynamic emerging market currencies within the SDR’s (IMF Special Drawing Rights) basket composition, each bears considering’.
Indeed, the G20 pressed ahead at Cannes with its review of the international monetary system through the IMF, the international banks and other financial agencies, noting specifically that the SDR basket composition should reflect the role of currencies in the global trading and financial system and be adjusted over time to reflect their changing role and characteristics. ‘As China graduates from net consumer to net issuer of such … assets, commensurate with its heft in the global economic, trading and financial system, its ability to fill the breach in supply of such assets will lend stability to the international monetary order’, Gupta observes.
The value and performance of the G20 has entrenched it as the world’s premier body for global economic governance. Its incorporation of the key emerging economies, as demonstrated again through Cannes, is a huge strength. Europe in fact cannot handle its problems alone. Interestingly, the assessment of a G20 Research Group at the University of Toronto’s Munk School of Global Affairs of G20 member country performance against commitments (on exchange rates, trade, financial reform and the like) between the Seoul Summit and Cannes scores them highly, except for Argentina which came in with a grade under 50 per cent. Inexplicably, the EU was ranked above all its individual members. Australia was top of the class with over 90 per cent. South Korea and Russia (like Australia, not former G7 members) were also in the top 10 and, although emerging economies (and the United States) were in the bottom half, the modal score was high. The G20 is gradually earning its stripes.
Weaknesses in the process, by its nature, there are bound to be; but the G20 continues to confound the naysayers with the value it has added to global cooperation through the crisis and it no doubt can continue to add through the long haul of recovery and return to global growth.
Peter Drysdale is the editor of the East Asia Forum.