The real G20 agenda

The real G20 agenda

The real G20 agenda

Written by Katinka Barysch, 13 March 2009

by Katinka Barysch

Finance ministers from the G20 countries are meeting in London this weekend to prepare for the global economic summit at the start of April. Expectations are high. But what will the summit be about? Judging by recent comments from European leaders, the agenda will include clamping down on tax havens, regulating hedge funds and cutting bankers’ bonuses. Most commentators agree that these questions are not the most pressing for restoring financial stability and economic growth. Martin Broughton, president of the UK employers’ federation CBI, rightly dismissed them as “red herring issues”.

World leaders must focus two things: how best to work together to prevent an even deeper global recession; and how to avoid future crises of such magnitude.

The first issue is as pressing as it is divisive. While the US administration is pushing for more fiscal spending, the Europeans are reluctant, and most emerging powers are keeping quiet. Many countries are loath to commit to more budget spending before they know whether and how their existing emergency packages are working. The second part of the agenda is longer term and fiendishly complicated. No-one should expect an unwieldy group of 25 or so (G20 has become a misnomer) heads of state to discuss the minutiae of capital adequacy ratios or cross-border supervision. The G20 is a process, not an event, and this summit is a political exercise, not a technical one.

What the April meeting is really about is maintaining faith in multilateral solutions at a time when the temptation for go-it-alone and beggar-thy-neighbour policies is growing. If leaning on Liechtenstein or forcing disclosure onto hedge funds helps this cause then so be it. But in terms of confidence building two issues appear paramount: the role of the International Monetary Fund and governments’ commitment to avoid protectionism.

Since September 2008, the IMF has lent over $50 billion to countries ranging from Pakistan to Ukraine. It urgently needs more cash. The US and EU governments are supporting a doubling of the Fund’s resources to $500 billion. They appear less willing, however, to redress their own over-representation in international financial institutions. This would be a precondition for emerging powers such as China to contribute significantly to an increase in IMF resources, and – perhaps more importantly – accept its legitimacy at the heart of the global financial system.

The IMF needs enhanced legitimacy to fulfil other functions that will be equally essential for future financial stability. First, the world needs better surveillance of national macro-economic and exchange rate policies to address the kind of global imbalances that have contributed to the current crisis. The IMF already has such mechanisms in place but they need to be strengthened. Second, the Fund needs to expand its new, $100 billion short-term, conditionality-light lending facility for emerging markets that are well run. It could also encourage such countries to pool their foreign exchange reserves to make them available for emergency lending.

Without easily available emergency finance, emerging markets will conclude that the best insurance against future pain is to accumulate more reserves. They will do this by keeping their currencies down and running big external surpluses. This kind of policy, as practiced by China, has already caused lots of friction. In an environment where global trade is shrinking, it would fuel a nasty protectionist backlash in the West. That is why the G20 summit needs to produce a firm commitment to increasing the IMF’s role and resources while setting in train a thorough reform of its governance structures.

There are already some signs that protectionism is rising. World Bank economists have counted 47 new trade restrictions since late 2008. More than a third have been put in place by the G20 countries that pledged to avoid such measures at their November 2008 summit. But the real risk is not a return to a 1930s-style tariff war but what Richard Baldwin and Simon Evenett (in a recent CEPR paper) call “murky protectionism”: industrial subsidies, requests that banks lend to only local companies, or the use of environmental arguments to discriminate against foreign goods and services. Examples abound, such as the ‘buy American’ provisions in the US stimulus programme or Nicolas Sarkozy’s idea that French car companies should make cars only in France. Encouragingly, in these instances international outrage ensued and the governments in question backtracked. The risks, however, remain high.

Therefore, G20 leaders need to broaden the ‘no protectionism’ pledge from last November to cover non-tariff measures. And they need to task international organisations such as the OECD and the WTO with alerting the world to national measures that could be harmful for that country’s trading partners.

Katinka Barysch is deputy director of the Centre for European Reform.

Comments

Added on 30 Mar 2009 at 16:26 by Andrew Gibbons

Maybe it's time to establish or designate an independent referee organisation to assess the economic impact (i.e. the effective rate of protection) of any new trade policy measure by any country.

Not a new idea, but a non-partisan verdict on the implications of trade measures would bring objectivity and transparency to the debate -- and act as a disincentive for covert protectionism.

Added on 13 Mar 2009 at 21:54 by Aydin Sezer

Thanks Katinka,

We should admit that developed countries apply non-tariff measures, especially by using environmental arguments to discriminate against goods from developing countries. This is not a new policy in international trade.

How serious is the threat to the single market?

How serious is the threat to the single market?

How serious is the threat to the single market?

Written by Simon Tilford, 19 March 2009

by Simon Tilford

There has been a lot of anguished talk about how the EU’s single market is under threat. Much of this alarm has focused on government support for struggling car firms and public bail-outs of crisis-ridden banks. An erosion of the EU’s competition rules would be every bit as debilitating as the impact of the financial crisis and the resulting recession. But how serious is the risk to the single market?

On the face of it, there is plenty to worry those who see the single market as key to Europe’s future prosperity. First, any hope that the impact of the financial crisis on the ‘real economy’ would be limited has ended. In the face of huge falls in industrial output this year and the prospect of several years of very weak economic growth, many European industrial firms will go bankrupt. Wage subsidies and short-time working, and all the other strategies currently being employed to cope with the collapse of demand, can only be sustained for so long. Many of the firms that go bust will be fundamentally competitive, or at least appear so. EU governments will be under huge pressure to intervene to protect such companies. The way in which they intervene will be crucial. The Commission will have a real fight on its hands to ensure that competition is not distorted. It should be strong enough to enforce the rules. But much will depend on whether member-state governments support the Commission and on who is appointed to be the next EU commissioners for competition and the internal market.

Second, the landscape of European banking has changed fundamentally over the past year and competition policy in this sector has effectively been suspended. A number of the biggest EU banks have been nationalised in all but name and governments have moved to provide public guarantees for bank loans. The shot gun marriage of Britain’s Lloyds TSB with another high street British bank, Halifax Bank of Scotland (HBOS), has left the combined group controlling around a third of the entire UK market for consumer banking services. The German, Dutch and Belgian governments have bailed out financial institutions, while governments across the EU have recapitalised banks.

The dramatic increase in government influence over the lending process will need to be reversed if potentially serious distortions are to be avoided. There is a risk that pressure will be put on banks to maintain funding for national champions and to avoid lending to companies based in other EU states. Such politicised lending would undermine the efficient allocation of capital throughout the EU by protecting inefficient companies and reducing available funds for more competitive firms. Once the financial sector has stabilised and normal levels of financial intermediation have been restored, the Commission will have to get serious about ensuring that the EU does not retreat into such ‘capital protectionism’.

Third, a further deepening of the single market can be ruled out. Crucially, faster action to liberalise and integrate service sectors across the EU now looks out of the question. It was hard enough to gain consensus in favour of radical moves to dismantle obstacles to the integration of service sectors before the crisis, but it will be impossible in the face of the backlash against liberalisation. This is bad news. Service sectors account for around two-thirds of economic activity across the EU. Service sector productivity has been extremely weak for a number of years now, holding back economic growth. More competition at both national and European level would do much to change this, and boost economic growth.

The lack of service sector integration will be particularly damaging for the eurozone. Countries that decide to forego exchange rate flexibility as a tool of economic adjustment need to ensure that their economies can be flexible in other ways. If countries such as Spain and Italy are to recover their competitiveness within the currency union, they will have to boost their productivity. This, in turn, requires more competition in service industries. The alternative route to greater competitiveness – wage cuts – would condemn their economies to stagnation. And such wage deflation might not be possible in any case, as Germany is heading for deflation. It will be extremely difficult to cut costs relative to Germany, if German costs are falling.

The legal underpinnings of the single market appear robust. But there are real reasons for concern. The steady progress in reducing state-aid has been halted and is likely to be put into reverse. The partial renationalisation of bank lending is inimical to the emergence of a single capital market. And progress towards deepening the single market in services has ground to a halt. All this bodes ill for Europe’s growth prospects and the stability of the eurozone. All EU governments profess to be committed to upholding the single market. The next couple of years will determine the strength of that commitment. If member-states do not respect the Commission’s right to enforce those rules, the single market could indeed come under threat.

Simon Tilford is chief economist at the Centre for European Reform.

Comments

Added on 19 Mar 2009 at 12:23 by Andrew Gibbons

Simon is right to highlight the threats of government intervention to support businesses, non-market influences on bank lending and the stalling of Single Market reforms in the service sector.

There are also substantial threats to the principle of free movement of labour, both in government attitudes and at the more unpleasant end of the spectrum.

Germany's euro advantage

Germany's euro advantage

Germany's euro advantage

Written by Simon Tilford, 13 July 2010
From International Herald Tribune

What if the eurozone broke up?

What if the eurozone broke up?

What if the eurozone broke up?

Written by Tomas Valasek, 23 March 2009

by Tomas Valasek

The future of the euro may not be secure, warned the CER’s Simon Tilford in a January 2009 essay. The current economic crisis threatens to exacerbate the tensions within the eurozone, and an insolvent member-state... could default and leave the eurozone. Since January, the economic crisis has deepened further, and the eurozone’s weakest economies have come under even greater strain. This does not make their exit from the eurozone inevitable there is a strong argument in favour of keeping the eurozone together at any cost. But what if it did happen? What would leaving the eurozone mean in practice? What happens to the physical currency in circulation in the afflicted country?

There is a considerable body of precedents. Most historical currency unions have broken up. The most recent examples come from Central and Eastern Europe. Since the end of the Cold War, three countries with national currencies the Soviet Union, Yugoslavia, and Czechoslovakia have fallen apart, forcing their constituent parts to hastily adopt national currencies. To find out what the separation entailed, the CER spoke to an architect of one of those transitions: the former member of the board of the Slovak National Bank, Ján Mathes.

We asked him what a country leaving the eurozone would use instead of the euro. Several options are possible, Mathes said. Members of the eurozone have not kept a stock of national currencies in reserve so they would need to print and mint replacements. But if a country is in a hurry to leave the euro, there may not be enough time. Minting a sufficient number of new coins takes months. Producing today's high-tech, secure banknotes, from design to the printing stage, took Slovakia nearly a year. Even though eurozone members would need less time they would presumably revert to the design they used before adopting the euro printing hundreds of millions of notes still takes many months.

If a country left the eurozone abruptly, it would need to find temporary ways to separate its share of the euros from the rest. In the early 1990s, the Czech Republic and Slovakia chose to stick distinguishing stamps on their banknotes. We had thousands of people working day and night, putting tiny stamps on nearly 80 million old Czechoslovak banknotes, Mathes said. The Czechs affixed different stamps to their portion of the old notes and the currency was thus divided. Each side eventually printed its own currency, and the stamped notes were withdrawn and destroyed.

But what worked for the Czechoslovak koruna may not work for the euro. Stamps are easy to remove and the temptation to remove them would be strong. The value of the currency of the country leaving the eurozone is certain to plunge vis-à-vis the euro, so its citizens would remove stamps en masse, thus converting them to the more valuable original euros. Another physical solution, Mathes says, it to laser-engrave distinguishing marks onto the portion of the euros, which would have been allocated to the country departing the eurozone. This can be done relatively quickly and would make the currencies irreversibly different, said Mathes, adding “but I suspect that the European Central Bank will not look kindly on a state burning holes in its currency.

In many ways, the birth of the new currency would only mark the beginning of its troubles. A country would only resort to leaving the eurozone if it was in deep economic crisis but this guarantees that its currency will inspire little confidence. There is a risk that the currency’s value would slide uncontrollably. To prevent such a scenario, the new money would have to be introduced in tandem with a thorough stabilisation and recovery programme overseen and financed by the IMF or the World Bank.

But the same reforms, if introduced early, would also reduce the chances of a country dropping out of the euro in the first place. And the rest of the eurozone members will have strong interest to prevent anyone from leaving, because of the risks to the rest: a member's departure would weaken the credibility of the euro, deepening the sense of crisis and possibly forcing other countries to drop out. Self-interest may drive the rest of the eurozone to prop up the ailing country’s economy at nearly any cost. It is probably too early for ordering replacement currencies or burning holes in the euro.

Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.

Comments

Added on 15 May 2012 at 23:09 by Anonymous

And yet, The Polish economy is bucking the crisis trend and its currency remains strong.

Added on 13 May 2009 at 13:14 by Anonymous

There are also historical precedents in the break-up of Austria-Hungary as a single currency zone - which involved the same 'stamping' type exercise of old banknotes.

The Czechoslovakia-EU parallel is unfortunate, however, is unfortunate: it is a favourite analogy of Vaclav Klaus. Was that intentional? As a parallel, it merits examination, but the difference may be that here we are talking about single countries exiting not (probably) the immediate collapse of whole zone. Remember also that the historical parallels are linked to the failures and break-up of multinational *states* and were primarily triggered by political not economic factors (above all nationalism and unworkable political institutions) states. The EU has an advantage in being a looser and messier political structure, not a classic state. Or does it?

Added on 24 Mar 2009 at 16:08 by King of Ithaki

greece operates much more like some central american banana republic than a modern state. 500 families control the vast majority of the economy and have allowed the discooperation that greece is famous for to secure their positions by insuring roadblocks to reform. In greece, there are many "grandfathered" properties and attempts to clean up ownership information by the EU is met with cartoonish responses. Instead of inspecting the records and drawing up factual data, the government repeatedly attempts to create a database where they just ask.."hew , what do you think you own ??" and encourage inter family fighting that spans generations, all in the name of keeping the status quo. Greece could physically hold 35 million people and has enough waterfront land to encircle the entire continent of africa. It's mountains provide stunning views and there could be construction work for 25 years which would create a huge economic boost and eliminate the need for brussels to finance the political incompetence and incontinence that disrupts progress in greece. But that would require the 500 families to look beyond their koboloys...and see a greece with a future, and not think about packing their finances into their KOTERA and sail off to Monaco.

Added on 24 Mar 2009 at 09:50 by Anonymous

Since when was the Soviet Union a country?

Added on 23 Mar 2009 at 15:13 by Anonymous

Not very helpful to project the failure of Czecho-Slovakia on that of the Eurozone. The former was federalism by dissociation the latter 'federalism' by association. If your concerne is now how to print again you national currency then it might have been wiser not to join euro in the fist place

The eurosceptic illusion

The eurosceptic illusion

The eurosceptic illusion

Written by Simon Tilford, 05 July 2009
From The Guardian

EU economic reforms fall short on growth

EU economic reforms fall short on growth

EU economic reforms fall short on growth

Written by Simon Tilford, 30 September 2010
From Financial Times

Europe cannot afford to let Greece default

Europe cannot afford to let Greece default

Europe cannot afford to let Greece default

Written by Simon Tilford, 15 January 2010
From Financial Times

How to reform the European Central Bank

How to reform the European Central Bank

How to reform the European Central Bank

Written by Jean-Paul Fitoussi, Jérôme Creel, 11 October 2002

A trade surplus is not always a sign of strength

A trade surplus is not always a sign of strength

A trade surplus is not always a sign of strength

Written by Simon Tilford, 04 March 2009
From Financial Times

New designs for Europe

New designs for Europe

New designs for Europe

Written by Charles Grant, Katinka Barysch, Steven Everts, Heather Grabbe, Peter Hain, Ben Hall, Daniel Keohane, Alasdair Murray , 04 October 2002

Syndicate content