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The G-20: Struggling to remain relevant

Jun 25, 2012

Shyam Saran, former Foreign Secretary with Government of India, feels that the steps agreed upon at the recently concluded seventh G-20 summit could lead to economic recovery, temporarily, in the advanced economies, but, the issue of severe structural imbalances that lie at the root of current economic crisis, has still not been addressed.

 

The seventh G-20 Summit at Los Cabos, Mexico, concluded on June 19 with results that may seem encouraging in the short-term, but embedded with additional risks for the medium and longer-term.

 

There was a shift of emphasis from fiscal consolidation and macro-economic balancing to promoting growth and employment. This could lead, at least temporarily, to economic recovery and higher growth in the advanced industrialised economies. However, this would also imply further postponing the inescapable need to address the severe structural imbalances that lie at the root of the current global financial and economic crisis. A massive amount of liquidity has already been injected into the global economy. This has not kick-started recovery, as banks remain averse to lending and companies, sitting on huge piles of cash, are wary of investing. Once recovery does commence, there is every danger that all this stored liquidity will unleash an inflationary upsurge.

 

Quite predictably, the Eurozone crisis dominated the proceedings, just as it had the earlier Cannes G-20 Summit. The difference lies in the greater specificity of measures listed for dealing with the crisis. These include a reference to the EU Fiscal Compact, the establishment of the European Stability Mechanism, the move towards greater banking integration and Eurozone-wide deposit insurance. In line with the shift of emphasis towards growth, the Declaration also refers to the role of the European Investment Bank in promoting growth and financing employment generating projects.

 

Taken together, these elements reflect greater political pressure on Germany, which has been a champion of austerity and fiscal discipline within the Eurozone. However, German Chancellor Angela Merkel relented on growth only with a parallel commitment to greater European integration and policy coherence.

 

 

The EU Summit, scheduled to be held at the end of this month, will give a clearer indication as to whether the move towards greater integration will command consensus and how rapidly it could be implemented. Several countries including France may find it difficult to mobilise domestic political consensus in favour of the loss of sovereignty and autonomous decision-making that further integration would imply.

One could say that the G-20 made an important contribution to boosting international confidence by significantly adding to the rescue funds available to the International Monetary Fund (IMF). Thanks to pledges made by the BRICS countries (India contributed 10 billion dollars), IMF Director-General Christine Lagarde was able to announce an additional 430 billion-dollar increase in IMF reserves.

 

These additional funds, together with the previous augmentation committed by members, give the IMF much more “firepower” to deal with liquidity crises among Eurozone countries as well as others. In this case, the major emerging countries stepped up to the plate. The US was not among the contributors. It is true that the pledges made to increase IMF reserves will make only a marginal impact in view of the scale of the sovereign debts, which have piled up in Eurozone countries. However, taken together with measures announced by the EU itself, the G-20 initiative may contribute to market confidence.

 

In previous Summits, emerging country leaders, but particularly the Indian Prime Minister, have been advocating a significantly increased flow of capital to finance infrastructural development in developing countries. This would promote much needed development in developing countries, while contributing to recovery in developed countries. While this was reflected in the earlier Summit declarations, it finds a more prominent place this time. Since private investment flows are currently depressed, infrastructure development will require increasing the funds available with Multilateral Development Banks to enable increased lending to developing countries. Whether this will happen in practice remains to be seen.

At the Seoul G-20 Summit, a parallel B-20 business summit was convened.

 

At Cannes, an L-20 consisting of representatives of labour and trade union organisations, also met on the sidelines. An interesting departure from earlier meetings was the issue of a joint B-20/L-20 communiqué calling upon G-20 leaders to take urgent and significant steps to promote recovery and employment in the global economy. The unusual coming together of both business and labour representatives reflects the seriousness of the crisis that countries across the world confront today.

 

Compared to the previous summits in Seoul and Cannes, the Los Cabos meeting appears to have salvaged some of G-20’s credibility as the self-appointed steering committee for global economic governance. What it needs to guard against is the inevitable tendency of such a forum to take on an overloaded agenda and get enmeshed in a forest of technical detail. Its value has been its informal and political character. Its future may depend upon its ability to resist a manifest slide into verbal inanity.

 

Emerging economies have the greater stake in the success of the G-20 and it is up to them to ensure that leaders focus on a more limited agenda and come up with substantive outcomes expressed in brief and simple language. Only then will the rest of the world listen.

(END/COPYRIGHT IPS)

* Shyam Saran is a former Foreign Secretary with the Government of India, current chairman of the Research and Information Systems for Developing Countries (RIS) think-tank and senior fellow at the Centre for Policy Research (CPR) in New Delhi.

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