The world leaders had a tough task in London: First and foremost don’t disappoint.
The much anticipated G20 Summit with the heading “Stability, Growth, Jobs” went ahead without any serious complications. Whether it can be called a successful summit is debatable, but what is certain is that it was not, as many predicted, unsuccessful.
A common approach in the battle against economic recession is important not only for the economy itself, but also for the people, who want to see that their elected representatives are not sitting on their hands, for market players, who are still waiting for any good news at all, and finally for the Third World, which needs reassurance that the developed countries have not forgotten it.
History has shown that summits of this kind may also do more harm than good, but that does not mean under any circumstances that they should not take place. Often singled out as an unsuccessful summit was the one in 1933, because the leaders failed to prevent protectionist tendencies, which resulted in deepening the economic crisis. Fortunately, history has not repeated itself this year.
It really happens very rarely that a meeting of the heads of the most developed economies, regional organisations and international institutions attracts such world attention. The meeting of representatives of countries and economic regions, which together create roughly 90 percent of the world economy, was anticipated with suspense on all fronts.
Some politicians went to the Summit with the aim of changing the entire financial system and the current international institutions and creating new ones. On the eve of the Summit, fears were still being voiced that it would end in a fiasco, because the differences in attitude of some countries were, in short, too great. Today, however, after the end of the Summit, it is evident that the meeting turned out better than anticipated. Angela Merkel even talks of an “historic compromise in this unique crisis.” Gordon Brown talks of the creation of a new world order.
The chief representatives are satisfied with the outcome of the Summit. Nor could they be otherwise. The expectations were so great that any doubt cast on the results achieved would only lead to further scepticism. It is necessary to realise the responsibility that the politicians had this Thursday. Any indication of inability to come to agreement would have been perceived as a strongly negative signal and a further undermining of confidence in the world economy. That is already very low.
Concrete result - surprise
In the official closing communiqué, the leaders explicitly state that the world economy is facing the greatest challenge of the modern age. Perhaps the most fundamental result is the understanding that they world will not get back on its feet without international trade. A USD 250 billion injection is to help oil the wheels of world trade, which, according to the latest estimates, is set to fall this year by 6-9 percent. These figures negatively influence the lives of millions in many countries.
Fortunately, the United States managed to convince the French that any solution to the economic crisis must be based on the principle of the market economy, which, however, must be accompanied by effective regulation and strong global institutions. The French and the Germans ultimately pushed through a certain regulative framework for hedge funds, other non-bank institutions and tax havens, and greater supervision of ratings agencies. Nevertheless, at the present time there are truly more important things on the table than a strong regulative framework. Among the most pressing is stabilisation of the American banking sector.
Many issues obviously remained under the table. It will be necessary to struggle against ineffective agricultural policies and insidious protectionism, which - although many politicians are unwilling to admit openly - are gradually becoming a reality. Whether a new financial system will be built is still uncertain. The requirements are there. The French President again accented the desire for creation of a global financial regulator. Regulation, which only a few years ago was a dirty word, has become a fashionable term. Doubts remain, however, as to whether strong regulation is a remedy and where the boundary of sufficient, but not excessive regulation lies.
It will also be fundamental - and this will be on the agenda during the next meetings - to coordinate a retreat from the contemporary expansive economic policy when the world economy starts to come back to life. If this “withdrawal” were to occur too late, the entire world runs the risk of a period of rapid inflation growth, which could deepen even further the impacts of the economic crisis. A further issue must be what to do in the future about state stakes in the economy - and not only in banking.
The growing role of the International Monetary Fund
The International Monetary Fund can be satisfied, just like the countries that make use of its aid. Not only have the resources for the IMF been significantly increased, but also the Fund has considerably simplified the rules for drawing financial aid - generally regarded as a very important step. It is important that countries can cooperate with the IMF without being regarded by the public, investors and other countries as risky. It is not clear, that is, how quickly this increased aid will get to the economies. If countries do not want to take advantage of the financial injection, no one can force them to do so. The fact is that certain countries have not had good experiences with this institution in the past.
The amounts that are being talked about are difficult to imagine even for macro-economists, never mind the lay public. The IMF is even creating its “own currency” to the value of USD 250 billion, which it will allocate to its members according to their quotas. The current situation is important for the IMF in that it is perhaps finally finding its role in the modern world. During the last years of growing economies, there was no great interest in its services and the IMF had to deal with seeking its own identity. The voting ratios in the IMF will probably also change soon - it is not sustainable in the long term that China should have the same vote as Italy.
The Third World is not forgotten
It is important to prevent the economic crisis from becoming a social and humanitarian one. The latest meeting could help in this. The Western powers are perhaps beginning to grasp that the political and economic world map is changing and that it is in their interest to include the new powers in the decision making mechanisms.
The G20 Summit correctly highlighted the issue of the Third World. An unusual matter from a Czech perspective was promoted among the developed countries especially by the British, and by world public opinion. The International Finance Corporation (IFC), - part of the World Bank, announced that it would try to get additional funding for aid to weaker regions.
It is stated in the G20 declaration that growth, in order to be sustainable, must be shared. For example, Sub-Saharan Africa in no way contributed to the current crisis, but nevertheless it is becoming one of the most afflicted regions. Apart from the crisis itself, the Third World has to deal with enormous debt - estimated at up to USD 1.4 billion - which ties the hands of the local governments even more.
A further negative factor is the still prevalent idea that countries should coordinate their economic policies with all that that entails. An example – fortunately now withdrawn – was the demand of the USA and IMF that each country should devote 2 percent of its GDP to the struggle against the crisis. This approach does not take into consideration the great differences and requirements of various countries and regions, never mind the fact that the options for fiscal stimuli are limited. During the Summit, the battle against protectionism and the attempt to develop global trade was once again accented. Unfortunately, in recent times words are not accompanied by actions.
The London visit was actually Obama’s first major trip outside the US following his election. We can only rejoice that only two days after G20, the US President also visited Prague. It is not the Czech Republic’s fault that Europe is still not as unified as it might be or that it cannot speak with a single voice and face its problems full on. Paradoxically, this crisis may bring nations together and, providing we avoid protectionist tendencies, may strengthen Europe. At least in as much that we are made aware of the mutual connectedness of the whole continent, not only in economic terms, but socially and politically.
Overall assessment of the Summit? Cautious optimism. It succeeded in subduing Sarkozy’s desire for excessive regulation (Sarkozy is satisfied, though. He succeeded in convincing his partners that it is necessary to reform the international financial institutions, which will be the biggest change since the Bretton Woods meeting in 1944), the Third World has not been neglected and the developing countries got considerable space. The demand for liquidation of the banking sector’s toxic assets is vague, but at least it highlights the most fundamental problem in a number of the most important economies. Overall, the world leaders came to an agreement on relatively concrete and coordinated steps. The meeting therefore fulfilled realistic expectations and is decidedly not a disappointment.
Obviously, economic policies have long since taken action against the crisis, and in a relatively coordinated way, not only in fiscal terms, but also in monetary terms - by reducing interest rates. In this the Summit could bring nothing new. Some important media are concerned that the world is doing too little with regard to the fact that we are - and today it is no hyperbole - in the greatest economic crisis of the last 80 years (what’s more, accelerated by the huge interconnectedness of all regions and sectors).
Certainly it is always possible to intervene more, but the interests of individual countries are varied. It was, however, an historic summit, not only because we are facing an historic crisis, but also because the world leaders are capable of negotiating and coming to agreement. And not disappointing the world public.