A bad year for global governance
(or a textbook case of euphemisms)
Financial Times, December 29, 2010
The world did not rise above short-term crisis policies
All in all, 2010 was not a good year for the global governance industry. With the financial crisis pivoting from the private financial system to sovereign debt, and global current account imbalances starting to re-emerge, the world needed robust mechanisms to cope with both. Instead it got a series of inadequate short-term deals that staved off immediate crisis while leaving the bigger problems in place.
In spite of the talk of reform to the international financial and policy architecture, and particularly the continued shift towards the G20 as a forum of governance, countries have yet to show that they have the political courage to form a consensus and take tough decisions.
In response to the sovereign debt crisis that began in Greece early in the year, for example, the eurozone authorities appeared in denial for months. Finally they cobbled together a rescue package that could have been far smaller had it come earlier. While it helped with liquidity, it ignored whether Greece had a solvency problem.
And although the EU has slowly and unevenly groped its way to creating a sustainable mechanism for rescue and restructuring, the eurozone’s leaders have signally failed to show the determination to deal with the problems in front of their noses. Germany has talked a good game about making private investors share the cost of any rescues in the future. But following the Greece experience, it acquiesced to the Irish rescue package, which similarly bought short-term stability at the expense of longer-term equilibrium by failing to reduce the debt owed by the country’s tottering banks.
It was the G20 meeting in Seoul in November where divisions were most clear. The US was instrumental in creating the G20 after the Asian financial crisis in 1999 and subsequently elevated it to heads of government status in 2008. It attempted to use the forum as a vehicle for global rebalancing – specifically pressing China to let its currency rise and reducing trade surpluses and deficits.
Washington did get China to allow the renminbi to crawl a couple of percentage points upwards and apparently made some progress on setting targets for current account imbalances. But the US campaign was undermined by fears it was trying to push down the dollar by the Federal Reserve’s return to quantitative easing. Barack Obama’s administration and the Fed were fatally slow in countering the accusation. In the end the G20 avoided public disagreement only by backing away from binding goals and resorting to a familiar cop-out: punting the issue to the International Monetary Fund.
The problem is wider than the specifics of financial rescues and current account balances. Both advanced and emerging market countries must take some blame.
With the US declining in relative terms as a hegemon, the days have passed when it could turn up to international summits and railroad through decisions without bothering to win the argument in advance. While emerging markets have shown their willingness to veto policies they do not like, they have generally yet to put forward coherent alternatives. The Bric nations (Brazil, Russia, India and China) hold heads of government summits but, divided by evident yet unacknowledged divergences of interest, they agree on little except attacking richer countries.
Creating new structures is all very well, but structures do not make policy. Governments cannot avoid addressing differences of opinion by appealing to process or shuffling off the responsibility to agencies such as the IMF, which have plenty of technical expertise but a shortage of political heft. Governments in 2011 need less talk about the potential for the G20 to revolutionise global governance and more focus on what it can actually achieve right now.