THIS WEEKEND in Toronto the Group of 20 leading economic states meet to consider how they should act to consolidate public finances, co-ordinate withdrawal of stimulus packages, create conditions for restoring growth and decide on a common approach to bank levies and financial transaction taxes. It is a large agenda reflecting the impact of the global economic crisis and will see tensions over what priority these various objectives should have. The G20 can claim legitimacy because it is now more representative of the whole world rather than only the most developed states, producing some 85 per cent of international income.
That is one of the most important shifts in world politics since the end of the cold war. It brings emerging states like India, China, Brazil, Indonesia, South Africa and Mexico to the table, along with relative newcomers like Russia and long-standing members of the club like the US, Canada, Japan, Germany, the UK, France and Italy. In its expansion, Spain and the Netherlands have found a niche role, while the European Union now co-ordinates G20 policy among its own members. This is a self-selecting inter-governmental and often messy arrangement among existing political leaderships; but it undoubtedly influences policy-making in a much more interdependent world.
The new reality can be seen clearly in China’s decision this week to relax its currency peg against the dollar. The G20 gave it a multilateral setting to make the shift, rather than having to respond to bilateral US pressure. There will be renewed international focus now on how the Chinese can encourage more domestic growth instead of relying on exports to the rest of the world. A similar concern about economic balances between fiscal consolidation and economic development underlies tension between the US and European approaches, most notably with Germany. The US fears that concentrating too much on budgetary rectitude risks stifling renewed economic activity and employment.
There is more of a consensus on the need to correct lax financial regulation and prevent such a crisis happening again. Bank levies and a financial transaction tax are to the fore in this discussion. Last week’s EU summit mandated it to lead efforts to set a global approach for introducing systems of levies and taxes on financial institutions so as to create a level playing field. Already Germany, France and the UK have introduced them and the Obama administration also favours them. But Canada, Japan and Brazil disagree, partly because they say this would penalise their own better financial regulation. The EU is also committed to exploring the introduction of a global tax on financial transactions. This is potentially a more radical innovation, with wider applications in areas like climate change and development policy, and deserves support.
A more multi-polar world is also one that is prone to greater conflicts of interest between different states and regions. There are signs of greater closure and revived protectionism alongside those of continuing globalisation. The G20 is a key way to manage these tensions.