London G-20 Summit Industrial Nations Celebrate-Trillion Dollar Compromise
Gordon Brown had promised a "global New Deal," and that was what the host was determined to deliver at the end of the G-20 summit. To underline his point, the British prime minister chose rousing words for his closing G-20 remarks: "This is the day that the world came together to fight back against the global recession."
"The old Washington consensus is over," Brown said in his speech in an enormous London convention hall before hundreds of journalists from around the world. "Today we have reached a new consensus." For the first time, he said, the 20 largest industrialized and emerging nations were in agreement on how to jointly manage globalization.
And to avoid creating the impression that he was all talk and no action, Brown named numbers -- big numbers. By next year, Brown said, $5 trillion (€3.7 trillion) would be pumped into markets worldwide, an "unprecedented fiscal expansion." And the G-20, he added, now plans to add another $1 trillion that will be channeled through the International Monetary Fund (IMF) and the World Bank primarily to developing countries.
It was the sort of inspiring message that the British and Americans had wanted to see emerge from this G-20 summit. US President Barack Obama called the summit a "turning point" in the crisis. "After weeks of preparation ... we have agreed upon a series of unprecedented steps to restore growth and prevent a crisis like this from happening again," he said at the end of the summit. The final document, he said, serves as a good starting point for further meetings within the G-20 group. Now, he added, it will be up to the individual governments to implement their individual stimulus programs. The faster they take effect, he said, the "more all of us will benefit."
The German government, for its part, would have preferred not to see any numbers for fiscal stimulus programs in the closing documents. Indeed, it had even deleted the relatively modest figure of $2 trillion from an earlier draft version. But now Brown was talking about $5 trillion plus another $1 trillion, and German Chancellor Angela Merkel was expected to go along with it.
Germany, the chancellor said unconvincingly, would also benefit from the money going to emerging and developing countries, which, after all, are its trading partners. "Every country that gets back on its feet is a win for Germany," Merkel said.
A Summit of Double Messages
But the chancellor would have preferred a different message to emerge from the summit. She made her preference clear by speaking at length about progress on regulation rather than the billions in stimulus spending. She was pleased to note, she said, that tax havens will now be placed on a blacklist, and that there will be closer monitoring of all financial market institutions and products. In short, she said, she was pleased that "the profit margins and possibilities for disappearing afterwards are limited." Her most trusted ally, Finance Minister Peer Steinbrück, concurred with her position when he said that the closing document contained a "remarkable" sentence: "The era of banking secrecy is over."
To the very end, this G-20 summit remained a summit of double messages. The British and the Americans emphasized stimulating the world economy, while the Germans and the French favored more regulation. In two separate press conferences on Wednesday, Brown and Obama stated one position while Merkel and Sarkozy stated the other.
These differences remained, even after hours of summit discussions. Under these circumstances, it seemed almost comic for Merkel to have praised the "spirit of camaraderie" at the meeting. Host Brown had repeatedly appealed to the world leaders' sense of responsibility not to focus solely on their own interests. Nevertheless, this gathering of leaders worked the same way every summit works: There were disputes over wording, and each attendee paid close attention to reactions from the press at home. The meeting ended with a compromise that was more or less accepted by all. This sort of thing is commonplace in the European Union, where more than 20 nations are sometimes at odds, Merkel said dryly.
The German delegation, surprisingly enough, felt that -- given the scope of the crisis -- it was odd that the group seemed to argue over every word. For example, the attendees discussed whether it would be preferable to refer to the "failure" of the financial system or merely its "weaknesses." They eventually agreed on "failure."
The closing document is not the great step forward that Brown had touted. The $5 trillion figure he mentioned merely represents a stocktaking and seems excessive. But one thing was achieved: The group agreed that it will be important in the long term to reshape the IMF and upgrade the Financial Stability Forum into a global financial supervisory authority. The document reads much more concretely than earlier G-8 summit statements. This is because the pressure to succeed was so considerable. If the closing document were trivial, the markets would plunge, Lord Malloch Brown, a junior minister in the British Foreign Ministry, warned a few weeks ago. But now the markets are up.
It is likely that this is mainly the result of the additional $1.1 trillion that will now be pumped into the world economy. This total will be allocated as follows:
- The IMF line of credit for poor nations will be tripled from the current $250 billion to $750 billion. Half of the additional $500 billion will be available immediately, while the remainder will be added "in the medium term," the document states. The EU will contribute €75 billion ($101 billion). Japan has pledged another $100 billion (€74 billion), as has the US government, although its contribution must first be approved by Congress.
- The IMF's Special Drawing Rights will be boosted by $250 billion (€185 billion).
- The World Bank and the regional development banks will receive $100 billion (€74 billion).
- In addition, $250 billion (€185 billion) will be made available in the form of loan guarantees that can stimulate global trade through export growth.
Why Obama Was So Reserved
The German government will now face new financial burdens despite Steinbrück's prompt assurances that Germany's share of the IMF funds would not come from the federal budget but from the Bundesbank, the country's central bank. The finance minister also emphasized that none of the G-20 countries is under any obligation to introduce a new economic stimulus program. The point he was trying to make is that the German government held its ground against the United States on this issue.
As is always the case after summit negotiations, each side declared itself the winner. The Germans and the French were pleased to note that Merkel's and Sarkozy's Wednesday riotous press conference was responsible for a complete turnaround. They celebrated the fact that the addendum on regulation of the financial markets was upgraded to a "declaration of the heads of state and government." The passages on hedge funds, ratings agencies, tax havens and executive compensation had also been made significantly longer and more specific.
'We Aren't Finished Yet'
The successes are symbolic in part, and on issues like executive salaries and hedge fund regulation, in particular, the devil is in the details. But Merkel believes that symbols are important, particularly to the public, whose fury against bankers has to be channeled in some way. At the beginning of the summit, Obama said that he didn't want to talk about blame, but preferred to look forward. The continental European, on the other hand, insisted that the question of blame not be ignored. The crisis did not originate in Europe, Sarkozy said bluntly.
Obama said afterwards that he had heard the accusation that the crisis began in the United States several times during summit talks, a charge that he did not dispute. On the whole, he said, his counterparts were extremely nice to him, and many had expressed their admiration.
It does not say much for Brown's diplomatic skills that, as host, he was taken by surprise by the German-French duo's mutiny just before the beginning of the summit. Normally, the final documents have already been largely fleshed out by this point. But this time there was a significant need for adjustments. "We aren't finished yet," Sarkozy said threateningly on Wednesday, and his prediction came true. Work on the revisions lasted until late at night, and the passages on hedge funds and tax havens were only completed shortly before the press conference.
The miniature conflict was waged primarily among the EU members with summit experience, while the new US president remained reserved. Obama used the summit mainly to get to know the players on the world stage. His counterparts were impressed by his calm demeanor, too. Merkel praised Obama for having played a very constructive role.
Obama called it a "productive summit" -- but he added that any comparisons with the Bretton Woods summit, where a new international monetary system was adopted in 1944, would be mistaken. "Well, if there's just Roosevelt and Churchill sitting in a room with a brandy, that's an easier negotiation," he said. "But that's not the world we live in."