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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Julian Kassum
Six G20 summits at heads of state and/or government level have been held in the three years that followed the outbreak of the 2008 global financial crisis. The latest gathering of G20 leaders, who now meet once a year, took place in November 2011 in the city of Cannes on the French Mediterranean. The next G20 summit is scheduled for June 2012 in Los Cabos (Mexico) at the tip of the Baja California peninsula. Host countries of G20 summits have a big influence over the meetings’ agenda and outcomes. The latest events in the world economy also play a determining role in the dynamics of G20 discussions and the ultimate decisions of G20 leaders
The financial crisis as a trigger
The first G20 summit took place in Washington in November 2008, two months after the collapse of US investment bank Lehman Brothers, the largest bankruptcy in US history.
A year before, in September 2007, Northern Rock, one of the UK’s largest mortgage lenders, was among the first financial institutions to be hit by the global “credit crunch”, a term used to describe the severe contraction of credit resulting from the collapse of the subprime-mortgage market in the US.
In less than 12 months, the subprime crisis hit one bank after another. Renowned financial institutions like UBS, Citigroup, Merrill Lynch, Barclays and the Royal Bank of Scotland announced major losses, revealing their massive exposure to securitized debt from subprime loans. In a climate of growing suspicion within the financial sector, banks refused to lend money to each other, or only at very high rates. To ease the availability of credit, central banks from the US, Canada, Switzerland and the European Union made successive cuts in their respective interest rates and granted billions of dollars of loans to their financial services industries.
The IMF warned that the global financial sector faced potential losses of almost USD 1 trillion as a result of the credit crunch. The fear was that the lack of money flowing in the system would lead to a prolonged reduction in economic activity. Governments and central banks intensified their efforts to bail out failing firms and inject liquidity into the markets. In September 2008, the US Federal Reserve announced a spectacular bail-out of mortgage lenders Fannie Mae and Freddie Mac. Shortly afterwards, the US government saved AIG, the country’s largest insurance company, from going bust. [Page38:]
The following month, the US House of Representatives passed a USD 700 billion government plan to rescue the financial sector. The US Federal Reserve made an additional $US 900 billion of short-term lending available to banks and provided an extra $US 1.3 trillion of loans to companies outside the financial sector. Several European countries, such as France, Germany and the UK, announced similar plans to save their financial industries and took steps to nationalize their most deeply affected banks. China introduced a broader economic stimulus package, worth $US 586 billion, to boost domestic demand through investment in infrastructure and social projects.
When G20 leaders met in Washington in November 2008, concerns about the availability of credit and the resilience of financial institutions had been partially alleviated. But markets remained extremely nervous. The eurozone officially entered into recession and the US faced a dangerous rise in unemployment. The challenge for G20 leaders reunited for the first time in Washington was a dual one: to prevent the financial crisis from developing into a fully fledged economic depression, and to ensure that a global crisis of this nature would not happen again.
Towards a revamp of the financial system
In Washington, the first preoccupation of G20 leaders was to get an accurate diagnosis of the root causes of the crisis. Three direct causes were singled out in the Washington Declaration: (i) the failure by market participants to appreciate risk and exercise due diligence in their investment decisions; (ii) the availability in the market of increasingly complex and opaque financial products leading to excessive leverage and irresponsible practices; and (iii) the inability of policymakers, regulators and supervisors “in some advanced countries” to keep pace with financial innovation and address the risks building up in financial markets. As an underlying factor in the financial crisis, the G20 cited the lack of coordination among the world’s major economies and the resulting “unsustainable global macroeconomic outcomes”, alluding to the excess of liquidity ensuing from global economic imbalances, i.e., the pattern of large current account deficits in some advanced countries matched by large capital inflows into those countries from surplus emerging nations.
G20 leaders expressed a sense of satisfaction with the actions they had taken at home to restore credit, reduce interest rates, and help recapitalize banks. The group agreed to pursue its efforts in a coordinated fashion to further stabilize the financial system and increase global demand. Boasting their attachment to open markets, G20 leaders committed their countries to refrain from raising new barriers to trade and investment for a period of one year.[Page39:]
The most tangible outcome of the Washington Summit came in the area of financial reform. G20 leaders agreed on five global principles for action and mandated their finance ministers to work on a series of short- and medium-term measures. Their Action Plan covered the most critical issues raised by the financial crisis and provided direction on a range of topics which G20 finance ministers had long been struggling to resolve:
The outcomes of the Washington Summit are laid out in the Declaration of the Summit on Financial Markets and the World Economy15.
The acceleration of stimulus measures
On 1 December 2008, the US economy officially fell into recession. By March 2009, unemployment in the US reached 8.5%, its highest level for over 25 years. The IMF has estimated that world output fell 0.5% in 2009, its worst performance since World War II. The slump was particularly pronounced in advanced economies, which suffered a 3.4% GDP contraction over the year.
After having poured billions of dollars into their domestic financial services industry, G20 leaders turned their attention to the wider economy. On 24 November 2008, Britain announced a range of tax cuts, loans and government spending projects totaling USD 28 billion. On 4 December 2008, France unveiled a €26 billion stimulus package featuring loans for carmakers and tax breaks on investments. On 12 January 2009, Germany approved its second stimulus package in two months with a €50 billion plan of tax cuts, consumption incentives and new construction projects. On 17 February 2009, the US enacted a huge USD 787 billion stimulus package aimed at boosting vital sectors of the US economy and at saving or creating 3.5 million jobs.
By the time of the London Summit, virtually all G20 nations - including Brazil, India, and Saudi Arabia - had embarked on some type of fiscal stimulus plan. The US felt, however, that its G20 partners should take a step further and substantially increase their efforts to boost global demand and lift the world out of recession. European countries, wary of taking on more debt, rejected such a call, insisting that the summit should instead focus on developing tougher rules for financial regulation and cracking down on tax havens.
A global plan for the world economy
In London, the G20 announced a global recovery plan of USD 1.1 trillion to be channeled mainly through the IMF and the World Bank.
G20 members agreed:
G20 leaders were unable to agree, however, on expanding their economic stimulus packages at national level. Instead, the G20 asked the IMF to monitor the effectiveness of the stimulus measures already in place in various parts of the world, which collectively amounted to a $US 5 trillion kick-start to the world economy.
In his preparatory work for the Summit, UK Prime Minister Gordon Brown insisted on making the issue of rescuing developing countries a major objective of the meeting. Many poorer nations lacked the budgetary resources to introduce their own stimulus measures and suffered from increasingly limited access to international capital markets. The global recovery plan of $US 1.1 trillion was especially designed to help developing countries rebound quickly and contribute to restore global demand.
The London Summit was decisive in several other areas. The G20 announced the creation of the Financial Stability Board (FSB) as a successor to the Financial Stability Forum (FSF) with an expanded membership and a strengthened mandate. G20 leaders endorsed high-level principles on pay and compensation for implementation by financial institutions, calling on financial institutions to refrain from paying bonuses over short periods where risks are realized over long periods. Claiming that “the era of banking secrecy is over”, the G20 announced that it would take action against jurisdictions that failed to meet international standards on tax transparency. To increase the pressure on non-transparent jurisdictions, the London Declaration explicitly referred to an OECD list of tax havens and other uncooperative countries.
In line with its Action Plan for financial reform, the G20 called for tougher regulation of hedge funds and other parts of the shadow banking system and a stronger oversight of credit rating agencies. The G20 did not, however, touch on the problem of cleaning up toxic assets in banks’ balance sheets, which the IMF and economic experts had identified as a major source of blockage in the supply of credit.[Page42:]
The outcomes of the London Summit are laid out in three declarations: the G20 Action Plan for Recovery and Reform, and its two annexes: the Declaration on Strengthening the Financial System and the Declaration on Delivering Resources through the International Financial Institutions.16
A hesitant recovery
A few days before the Pittsburgh Summit, the US and the UK announced that they were officially out of recession. Preliminary indicators suggested that Germany, France and Japan had also moved back into growth. Recovery was especially strong in emerging markets, with Chinese growth reaching 8.7% during 2009, exceeding all initial expectations.
With unemployment still on the rise in the US and much of Europe, the temptation for G20 countries to cede to protectionist pressures remained strong. In a report prepared for the Pittsburgh Summit, the WTO, OECD and UNCTAD warned against the resurgence of trade-restricting measures by G20 countries, such as “buy local” provisions which some of them had inserted in their stimulus packages.
The mood among G20 leaders was one of cautious optimism, reflecting a shared feeling that the world’s tentative recovery from the downturn would be at risk if major economies decided to withdraw their fiscal stimulus measures too early. As signs of recovery started to appear, the group now focused on getting agreement over the more contentious parts of its agenda, such as addressing global economic imbalances and finding ways to limit bonuses in the financial sector.
The G20 relaunched as world’s top economic forum
At the Pittsburgh Summit, the G20 designated itself the “premier forum for our international economic cooperation”. The G20’s first priority was no longer to fight off the financial crisis and save national economies from recession, but to secure a durable recovery based on a more balanced pattern of growth and demand across regions.
With this objective in mind, the G20 launched the Framework for Strong, Sustainable and Balanced Growth. The purpose of the framework was to promote long-term growth through the reduction of global economic[Page43:]imbalances. In practice, the G20 sought to encourage countries with high external deficits, such as the US, to increase private savings and strengthen their export sectors while prompting countries with large external surpluses, such as China and Germany, to boost consumer demand.
The G20 envisaged the Framework both as a global compact, whereby G20 members agreed on shared policy objectives, and a process for G20 nations to work together and subject themselves to a form of peer review supervised by the IMF. Through this peer review mechanism, known as the Mutual Assessment Process, the Framework’s aim was to foster stronger cooperation on macroeconomic policies and encourage G20 states to take into account the collective impact of their national policy decisions on the larger global economy17.
After a year-long battle over bankers’ bonuses between France and Germany, which wanted to cap them, and the US and UK, which favoured a more flexible approach, the G20 called upon financial firms to ensure that the payment of bonuses be tied to long-term performance and to distribute the larger part of bonuses in shares rather than cash. While the proposal for a bonus cap was rejected, the G20 asked national supervisors to review financial firms’ compensation policies and to raise capital requirements for firms which failed to implement sound compensation practices.
Among the other measures agreed at the Pittsburgh Summit was a commitment by G20 leaders to support a shift in the IMF quota share of at least 5% in favour of dynamic emerging markets and developing countries. G20 leaders also committed themselves to adopt a formula that would generate an increase of at least 3% in the voting power of developing and transition countries at the World Bank.
The outcomes of the Pittsburgh Summit are laid out in the “G20 Leaders Declaration: The Pittsburgh Summit”18.
Payback time
Government interventions to rescue their economies appeared to have saved the world from the prospect of a prolonged depression. But they left the public finances of many countries in shambles. The social damage of the crisis[Page44:]continued to be felt across Europe and the US, where jobless rates showed little sign of falling despite increasingly robust evidence of economic recovery in late- 2009 and early-2010.
Europe faced the additional challenge of maintaining confidence in the euro as fears were growing that Greece could default on its ballooning debt. In December 2009, Greece became the first eurozone member to lose its investment-grade status. The Greek government announced a first round of austerity measures, prompting general strikes and protests across the country. Ireland, Italy, Portugal and Spain were the other eurozone countries to make drastic cuts in public spending. Spain, where the unemployment rate climbed to over 20% for the first time in 12 years, saw its sovereign risk rating downgraded after record levels of household, corporate and public debt.
In May 2010, a three-year €110 billion bail-out was launched to help Greece meet its financing needs, with eurozone members ready to contribute €80 billion, and the rest to be provided by the IMF. A few days later, the EU and the IMF announced a wider €750 billion rescue plan to assist eurozone economies in difficulty. The plan included the creation of a “European Financial Stability Mechanism”, with a lending envelope of up to €60 billion, and the institution for three years of a “European Financial Stability Facility”, with a capacity to issue bonds for up to €440 billion, guaranteed by participating member states.
As the G20 convened in Toronto, G20 leaders faced a delicate balancing act in designing exit strategies (from stimulus packages) which would reduce public debt without tipping their economies back into recession.
Deepening the agenda
The Toronto Summit was not one of spectacular outcomes and announcements. Described by some participants as an “intensive working summit”, it resulted in an unusually long Declaration, reflecting the general evolution of G20 summits towards a deepening of policy debates and a greater differentiation among the commitments of G20 nations according to their individual circumstances.
The most pressing debate facing the G20 placed in opposition proponents of an expansion of fiscal stimulus measures to secure short-term economic growth and proponents of a return to austerity to safeguard public finances. The US, which supported additional stimulus, argued that economic growth was a prerequisite to reduce public deficits and debts. France, Germany and the UK expressed concern over their rapidly worsening public finances and the risk of a downgrade in their sovereign ratings.[Page45:]
The G20 settled for a middle-of-the-road strategy which could be summarized along the lines of “stimulus now, exit soon and fiscal consolidation in the medium term”19. G20 leaders agreed to keep their fiscal stimulus in place while starting to communicate on “growth-friendly” fiscal consolidation plans. Advanced economies committed to halve their deficits by 2013 and to stabilize or reduce their government debt-to-GDP ratios by 2016. Emerging economies pledged to strengthen their social safety nets, boost infrastructure spending, and promote greater exchange rate flexibility as a way to increase domestic demand. However, the G20 was careful to specify in the Toronto Declaration that individual G20 countries should be free to tailor their actions to their own national needs.
Another heated debate in Toronto was about the responsibility of the financial sector for sharing the burdens associated with government interventions to bail out financial institutions and stabilize the financial system. G20 leaders recognized that the financial sector should make a fair and substantial contribution and that taxpayers should be protected from the costs of financial risk. They could not agree, however, on the joint introduction of a levy on financial institutions, as proposed by France and Germany.
The discussion of financial sector reform in Toronto centred on strengthening capital requirements for banks and supporting the current work of the Basel Committee on Banking Supervision towards creating a new global regime for bank capital and liquidity. G20 leaders called for an acceleration of measures aimed at improving transparency and regulatory oversight of hedge funds, credit rating agencies and over-the-counter derivatives, and asked the FSB to review individual country progress in implementing these reforms.
Two new working groups were launched by the G20 in Toronto - a Working Group on Corruption and a Working Group on Development - charged with preparing concrete recommendations for consideration by G20 leaders at their next summit in Seoul. In addition, the G20 published a declaration on improving access to financial services for the poorest.
The outcomes of the Toronto Summit are laid out in the “G20 Toronto Summit Declaration” and the “Principles for Innovative Financial Inclusion”20.[Page46:]
The spectre of a currency war
The Seoul Summit came at a time of escalating economic tensions among major G20 economies, leaving observers to speculate about the risk of a full-blown trade and currency war. In addition to the long-running dispute over the Chinese yuan, which many of China’s trading partners believed to be undervalued, several nations accused each other of manipulating exchange rates by a variety of means in order to gain competitive advantage for their exports. The fear of a return to “beggar-thy-neighbour” policies was starting to materialize as countries with stable or rising currencies threatened to erect new trade barriers against those who allowed or assisted their currencies to slide.
International frictions over exchange rates hampered G20 efforts to address global economic imbalances. While all G20 members accepted the reduction of imbalances as an objective, they disagreed on their underlying cause or solution. As many observers noted, the willingness of G20 countries to work together, which was strong at the height of the crisis, had considerably diminished.
The world economy was increasingly split between a booming south, with emerging and developing economies achieving 7.4% growth in 2010, and a struggling north, where growth rates returned to their pre-crisis levels but unemployment and public debt kept on swelling. The vitality of emerging markets fueled a burgeoning demand for commodities, pushing the world dangerously close to a new global food crisis. Korea, the first non-G8 country to host a G20 summit, was determined to put development issues at the core of the meeting.
A hard-fought deal
The G20 launched the Seoul Action Plan which committed G20 leaders to country-specific actions in five policy areas:
As was expected, G20 leaders were unable to agree on specific targets or a timetable to redress a growing imbalance in current account deficits and surpluses among G20 nations. Instead, the Seoul Declaration and its supporting documents laid out a list of individual country pledges to be undertaken by each G20 member. The group also agreed to enhance the Mutual Assessment Process and called on their finance ministers and central bank governors to establish a set of indicative guidelines to facilitate the identification of large economic imbalances that required preventive or corrective actions.
In the area of financial sector reform, the G20 endorsed the new rules on the quantity and quality of banking capital, liquidity and leverage, known as “Basel III”, which had been recently finalized by the Basel Committee on Banking Supervision. G20 countries committed themselves to translate the new framework into their national laws during an implementation period running from 2013 to 2019. The group also endorsed the latest FSB proposals to tighten regulation of the over-the-counter derivatives market, to reduce reliance on credit rating agencies, and to reinforce the oversight of systemically important financial institutions.
Reflecting the desire of the Korean chairmanship to promote a more development-friendly agenda, the Seoul Summit marked the launch of the Seoul Development Consensus for Shared Growth and its Multi-Year Action Plan on Development. A nine-point G20 Anti-Corruption Action Plan was published to promote the integrity of markets and to assist G20 countries in their capacity-building efforts to combat corruption. The G20 also announced new measures and instruments to strengthen global financial safety nets and help developing countries cope with sudden swings in capital flows.
The outcomes of the Seoul Summit are laid out in six documents: “The G20 Seoul Summit Leaders’ Declaration”, “The Seoul Summit Document” and[Page48:]the accompanying table “Policy Commitments by G20 members”, and three annexes: the “Seoul Development Consensus for Shared Growth”, the “Multi-Year Action Plan on Development” and the “G20 Anti-Corruption Action Plan”21.
All eyes on Europe
When the G20 gathered in Cannes in November 2011, the minds of world leaders were again firmly focused on short-term matters. Hopeful signs earlier in 2011 of a strengthening of economic growth in Europe and the US were dashed in midyear by a spreading sovereign debt crisis in the eurozone and by an unedifying battle in the US Congress about raising the government borrowing ceiling which damaged confidence in the US political establishment and provoked a downgrading of US debt by one of the main rating agencies.
The biggest fear was that the rising cost of financing government debt in a growing number of eurozone member countries, accompanied by more and more austerity packages, could permanently derail an already fragile global recovery. The bail-outs of Ireland in November 2010 and Portugal in May 2011, followed by a second rescue package for Greece in July 2011, failed to alleviate market concerns over the solidity of the eurozone and the health of the European banking sector. At an emergency summit in October 2011, in return for further austerity measures by the Greek government, eurozone leaders decided to increase the leverage of the European Financial Stability Facility’s firepower to €1 trillion. They also agreed to a “voluntary nominal” 50% write-off of Greek sovereign debt held by private investors.
The IMF, the OECD and the European Union itself slashed their growth prospects for Europe, reflecting growing fears that the cumulation of austerity packages in the eurozone was likely to precipitate, rather than halt, the seemingly irresistible march back towards recession. With fiscal deficits at record levels and interest rates close to zero, governments from advanced economies were quickly running out of policy tools to turn the situation around.
As advanced economies stumbled, emerging markets faced a difficult dilemma between promoting domestic growth in the face of slowing global demand, and containing inflation which reached worryingly high levels in several countries like Brazil, India, China and Argentina. Economic uncertainties reignited the[Page49:]threat of a global currency war, as governments sought to curb unwanted surges in their currencies (e.g., Switzerland’s decision to cap the value of the Swiss franc in September 2011) or take retaliatory measures against countries alleged to be artificially weakening their currency (e.g., Brazil’s imposition of antidumping duties against Chinese steel tubes to protect domestic manufacturers from “unfair competition”, also in September 2011).
Another crisis summit
The French chairmanship had high ambitions for its G20 summit in Cannes, notably adding two highly complex topics to the group’s agenda: reforming the international monetary system and combating commodity price volatility. However, the summit’s official agenda was largely overshadowed by the Greek crisis and rapidly growing concern in the bond markets about the ability of Italy - by no means a small, peripheral eurozone member - to continue to finance its huge sovereign debt.
The G20’s response to the looming global crisis came in the form of an Action Plan for Growth and Jobs designed to address both the short-term and medium-term risks facing the world economy. The most immediate outcome was the decision of Italy, in response to strong pressure from its counterparts, to accept IMF oversight of its budget-cutting reforms. For the first time, G20 leaders explicitly noted China’s “determination to increase exchange rate flexibility consistent with underlying market fundamentals”. The Action Plan also covered country-specific measures to reduce excessive imbalances, boost confidence and raise output in all G20 countries over the medium term.
At France’s insistence, the Cannes Declaration gave strong emphasis to promoting employment and enhancing social protection. A G20 Task Force on Employment was formally launched, with a focus on quality jobs and youth employment. G20 leaders stressed the importance of providing social protection floors (such as access to health care, income security, and assistance for the working poor) as a way to stabilize demand and foster social justice.
France’s proposal to reform the international monetary system produced only timid decisions, including a pledge to review the composition of the IMF’s basket of Special Drawing Rights (SDRs) by 2015 (with a view to better reflect the role of emerging currencies) and a broad agreement to increase the IMF’s resources to more effectively contain the spread of the debt crisis to large economies like Italy and Spain. Specific numbers and modalities were left to a future meeting[Page50:]of G20 finance ministers, however, since many emerging countries insisted that eurozone governments should first agree among themselves on a clear and credible crisis resolution plan.
As part of their work to combat commodity price volatility, G20 leaders endorsed their agricultural ministers’ Action Plan on Food Price Volatility and Agriculture. A key feature of the Action Plan was the creation of an “Agricultural Market Information System” (AMIS) to improve information on the level of commodity stocks for four major crops: wheat, maize, rice and soybeans.
G20 leaders also took stock of progress in implementing their past decisions and orientations on strengthening financial regulation, fighting corruption and eliminating tax havens. The G20 agreed to ramp up the resources and institutional standing of the Financial Stability Board so that it could effectively monitor the implementation of G20-led financial sector reform at country level.
The outcomes of the Cannes Summit are set out in the “Cannes Summit Final Declaration”, the shorter “Final Communiqué of the Leaders”, the “Cannes Action Plan for Growth and Jobs”, and its annex “G20 members’ individual commitments”. In addition, 9 appendices (including ministerial declarations and working group reports on agriculture, employment, development and anti-corruption) are attached to the Cannes Declaration22 .
15 See http://www.g20.utoronto.ca/summits/2008washington.html
16 See http://www.g20.utoronto.ca/summits/2009london.html
17 See Chapter IV, “The G20 agenda” for an explanation of the Framework for Strong, Sustainable and Balanced Growth and the Mutual Assessment Process
18 See http://www.g20.utoronto.ca/summits/2009pittsburgh.html
19 See http://www.g20.utoronto.ca/analysis/kirton-seoul-perf-101113.html
20 See http://www.g20.utoronto.ca/summits/2010toronto.html
21 See http://www.g20.utoronto.ca/summits/2010seoul.html
22 See http://www.g20-g8.com/g8-g20/g20/english/the-2011-summit/declarations-and-reports/g20-cannes-summit-declarations-and-reports.1553.html