G20 and the Gordon Brown self-destruction show

For once, Gordon Brown has managed to up-stage his cross-channel compatriot, Nicholas Sarkozy, at a G20 event. This might have had something to do with the fact that neither Brown nor Sarkozy really belonged at a meeting for Finance Ministers and Central Bank Governors, so the Frenchman had understandably stayed at home. But that technical detail was not enough to stop Gordon Brown, oh no.

In case you missed it, Gordon Brown gate-crashed the G20 meeting in St. Andrews by backing a proposal for a transition tax. (For a backgrounder on the transition tax, see here). This continues the trend of the Prime Minister attempting to use home-turf advantage to blatantly hijack G20 meetings to advance his electoral prospects.

The trouble is, it's not working very well. Remember that $1 trillion dollar figure that emerged from the chaos of the London G20 summit? The one which Berlusconi is said to have described as "the most expensive election campaign ever?" No? Well neither is the British electorate come voting time next year.

At least after the London summit, Gordon Brown managed to temporarily project the image of international statesmanship. With his latest PR stunt, the PM just comes across as desperate. He clearly hadn't bothered to build a coalition for the idea, instead trying to catch his colleagues off-guard. The effect was predictable: representatives from Russia, Canada, the IMF, the ECB and, most singificantly, the United States immediately rejected the proposal. Without the US, the idea goes nowhere.

So Brown backtracked from his position by the end of the weekend, looking very much unlike an international statesman.

Here's the thing: I believe that Brown is sincere in his arguments for a new social contract in which taxpayers do not provide costless insurance for large financial institutions. But the way he has gone about promoting this view smacks of political manipulation and panic. His headline-grabbing attempt over the weekend was yet another episode in the Gordon Brown self-destruction show.

The rest:

The big disappointment for me in the G20 communique from St. Andrews was its deafening silence on the issue of macroeconomic imbalances. The Pittsburgh G20 communique from September impressed me in that it actually included a commitment to address the issue head-on (and somehow China agreed!). The real test for G20 commitments, however, is that they continue to appear is subsequent communiques. So far, this one isn't looking good.

Quick hits and pink picks: the future of the global economy

The G20 summit in Pittsburgh produced a consensus that, while complacency is dangerous and risks remain, the worst of the financial crisis/global recession has passed us by. So, what's next?

-World Bank President Robert Zoellick on life after the storm.

-Marko Dimitrijevic argues that the term 'emerging markets' is obsolete; the rising giants have arrived.

-Quickly shift your gaze from Germany to Ireland, where a hugely important re-do will affect Europe for decades to come.

-A sterling slide is good for Britain.

-Is China the developed world's new engine of growth?

Quote of the Day: China as saviour

In a Sunday interview with The Guardian, British Foreign Secretary David Miliband acknowledges China's unspoken assumption of great power status this past year, pointing to the G20 London meeting as a defining moment in China's rise. He goes on to offer the following 'joke':

'After 1989, capitalism saved China. After 2009, China saved capitalism.'

That Was The Week That Was

Politique
-The G20 reached deals on IMF funding, tax havens and trade finance. Bretton Woods it was not, but a productive start?
-North Korea launches an intercontinental ballistic missile (er, satellite), world condemns and an emergency security council meeting is called for Sunday at the UN.
-NATO agrees on a troop surge to Afghanistan, Rasmussen for Secretary-General.

Economia
-Mexico became the first country to seek access to the IMF's new no-strings-attached lending facility.
-The ECB cuts rates again and Trichet signals the possibility of unconventional measures to come.
-The mark-to-market rule is amended in the US, financial stocks soar.

The Rest
-In the Prem, Liverpool go top, Fab and Adebayor solidify Arsenal's hold on 4 in their return to action, while Shearer's big return to Saint James' Park is business as usual for the Magpies.
-Honda's new robotic helmet reads your mind. Matrix or Terminator?
-An Antarctic ice bridge the size of Jamaica has snapped.

Friday fun: Speak softly in the House of Windsor

The Queen finds Italian Prime Minister Silvio Berlusconi rather annoying.

Berlusconi is hilarious. By all accounts, the guy shows up late to the G20 (prior conference commitment in Rome), hangs around with little impact, slides his way into what is surely the most widely circulated photo of the conference and then annoys the Queen.

And this guy hosts the G8 in July. I can't wait.

The OECD gets things done, quickly

Less than 24 hours after the G20 agreed to "name and shame" tax havens through OECD oversight, the Paris-based organization publishes its list of offenders.

Tibet nearly sank the G20

Details are starting to trickle out of how close the French/Chinese fault line was to sinking the London summit. The Guardian is reporting that, remarkably, Tibet was the key issue linkage bringing the Chinese to the table on tax havens.

Read the article, its worth all the details, but I'll sum it up by saying it ultimately took a late night meeting between Sarkozy and Hu at the French president's hotel, and a last minute intervention by Obama, to smooth over the differences.

All sides are backing the account of Obama's last minute intervention; it seems the young US president is making good on his promise of a new era of US leadership.

All Sarko, All the Time

Any doubts that Sarko fancies himself leader of the free world? Apparently, he held his post-summit press conference at exactly the same moment as Gordon Brown, the host.

G20 communique tackles the easy questions

According to the FT, the final G20 communique makes the easy choices, and avoids almost all the tough ones (unless you ever really considered tax havens a sticking point). Gordon Brown is currently holding his closing press conference, putting a brave face on the meeting. Here are the preliminary details, keeping in mind that I have not read the communique yet:

-$750bn increased funding for the IMF ($500bn in new loans, $250bn creation of a new special drawing rights facility)
-$250bn in trade finance
-OECD to publish list of tax havens to "name and shame"
-Hedge funds will come under the direct supervision of national regulators

So, where do we stand? Well, the Europeans seem to be the big winners. The EU got its tax havens/hedge fund regulation, increased IMF funding and international trade support. We have no "grand bargain" on global financial regulation, but that was always as unlikely as a stimulus commitment. Sarko's showmanship seems to have worked; another successful summit for the great Summit Sarko.

I must say that the US/UK largely failed to obtain its priorities, especially a global commitment on fiscal stimulus. In his closing presser, Brown boasted of historic interest rate cuts and a global fiscal stimulus. But this was a classic summit tactic of framing actions already taken by national governments in the context of the summit consensus; when, in fact, no such consensus exists moving forward.

We will have much more to say about the G20 communique once we dive into the details. But initially, the agreement does seem pretty unremarkable, and the global fault lines appear as deep as they were heading in.

Quick hits and pink picks: G20 addition

Other, traditional media outlets will provide you with more comprehensive coverage of the G20 meeting in London. While a lot of bloggers would have you believe otherwise, newspapers still offer the best access, authority and overall coverage of events like the G20. I have no illusions to the contrary. So over the next few days, I'll instead aim to provide our readers with some of the more interesting, hilarious and overlooked anecdotes of this important meeting.

-It is fascinating to watch the public relations machines in overdrive ahead of the meeting: downplay the differences (US, UK), demand your red lines are met 'or else' (France, Germany), the other side just doesn't get it (Japan), mumble about the dollar to avoid taking a vocal stance on the most controversial issues (Russia, China), sit back and avoid the collateral damage (everyone else). Summits are always about image/message management, and unfortunately only rarely about radical or decisive action. As a colleague noted to me this week, 90% of a multilateral summit is completed before the principals even sit down at the table (sherpas do the heavy lifting in advance of the meeting itself). Each leader knows this, and thus positions him/herself accordingly ahead of the final communique, speaking directly to their domestic audience. The fact that such deep divisions are so publicly aired ahead of this particular summit suggests that there will be few major breakthroughs in London. Regardless of the post-summit rhetoric, increasing the regulation of hedge funds, while important, isn't going to solve any of our most immediate problems. Increasing IMF funding would occur with or without this meeting.

-The City of London was fighting back!! ahead of the protests, although I wonder how many are actually hanging around Bank and Moorgate after work this evening.

-Dan Drezner's April Fool's Day joke would be a lot funnier if it wasn't so, sadly, improbable.

-For two leaders with a chilly relationship, Merkel and Sarko have forged quite the formidable alliance at this summit. This front was built on tax havens in Europe and seems to be carrying through quite strongly to global financial regulation.

-Sarkozy, in fact, claimed today that China was the main obstacle to a deal on global regulation, blocking a provision on...wait for it...tax havens (which, by relation, is an issue directly connected to hedge fund regulation). Who would have guessed that tiny alpine kingdoms, English Channel rock formations and tropical islands would collectively sink a summit? And does it not seem a little too convenient for China to be cast as the problem when such deep divisions exist between the US/UK and France/Germany?

Ah, ze French

Determined to avoid yet another G20 yawn-fest, the French are now threatening a walkout. Their finance minister has indicated that she will not sign the final communiqué should their demands for "deliverables" not be met (re: a global financial regulator, conceived and implemented by the end of the week).

Spicy stuff. I'm not familiar enough with international diplomacy to answer this with confidence, but is France operating on such a different plane that it can threaten not to sign the G20 document, sign the document four days later, and suffer no significant reprecussions? Because if not, it's not clear to me what this publicity stunt will achieve. If the leaders summit was going to agree to set up a global regulator, the G20 finance deputies and their sherpas would have already have laid the groundwork for one. The leaked draft communiqué shows no signs of any truly "global" regulator, only a more integrated collection of national ones.

So if the French aren't likely to get what they want by Friday, what do they stand to gain?

The Pink Transvestite?

The Financial Times, also known as the pink lady, is one of the premier English language newspapers. But I am sad to report that the FT's sterling reputation was sullied last week. Not, mind you, by shoddy reporting, poor editing, or some journalistic scandal; rather, its name has been tarnished by the arrival of an impostor!

In a hilariously Onion-esque move, a collection of savvy G20 protesters were handing out fake copies of the Financial Times at Waterloo Station in London. The website for the fake newspaper, FT2020, looks pretty well identical to its mainstream target. There's a lot of content, some of it very sharp, so check it out.

The summer of our discontent

Millions of protesters took to the streets across France yesterday to protest what is loosely being described as the "economic policies" of French president Nicolas Sarkozy. I know, saying the French are taking to the streets is like saying the sun always rises. Obvious.

However, the protests are but the most immediate example of widespread and growing popular discontent with the financial crisis and the response of governments. Governments in Iceland, Belgium and Latvia have already fallen, and political instability is rising across Eastern Europe, Africa and Asia in response to food shortages, budget cuts and rising unemployment. Even in Russia, the United Russia party lost two local mayoral elections in restive eastern provinces, leading President Medvedev to introduce legislation that would allow provincial governors (appointed by the Kremlin) to replace democratically-elected officials at the local level. This follows brutal crackdowns on protestors; Moscow has become so sensitive to the risk of popular unrest that it recently flew special forces thousands of miles to snuff out local protests against rising tarriffs.

These examples seem to foreshadow a global summer of discontent as unemployment rises and government budgets come under greater pressure. This poses obvious risks to political stability and commerce. It also constrains the options available to policymakers, making beggar-thy-neighbor actions such as the imposition of trade barriers, subsidization or nationalization of industries and currency devaluation more likely. History tells us that these domestic political considerations, particularly in the developing world, risk reinforcing the downward economic spiral, as policymakers appease factions and fail to reach coordinated regional/global programs. They also risk, particularly in the case of currency devaluations, setting off a change reaction of competitive responses that, in the absence of regional cooperation, ultimately destabilizes the system as a whole.

The potential impact of growing popular unrest cannot be overstated. While violent inter-state conflict seems only likely over energy resources, the damage from economic warfare is still profound. Intelligence services have come to recognize this threat. In testimony before the US Congress, Director of National Intelligence Dennis Blair identified the financial crisis as the single greatest national security threat to the United States, before Al-Qaeda or nuclear proliferation. President Obama now receives a daily economic intelligence briefing from the CIA in addition to his traditional daily intelligence briefing. Economic and national security considerations have converged in the eyes of intelligence analysts and policymakers. One has to wonder whether this will lead to more mercantilist policy agendas as liberal economics loses credibility, multilateral cooperation stalls and popular discontent grows.

As we try to come to terms with the crisis and its implications, IPE, as an academic discipline, is well-positioned to explain and guide us through this complex global environment. The discipline arguably isolated itself for many decades as it sought to distinguish its theories from the traditional IR, realist paradigm that dominated both academic and official thinking during the 20th century. It discounted security considerations too much, pushing an almost Marxist-like bottom-line: the economic drives the political. But since the end of the Cold War the discipline has developed a greater appreciation for the security implications, and influences, within the global political economy. Freed from its self-imposed intellectual box, IPE now offers the most multidimensional, comprehensive analytical framework for conceptualizing and forecasting the economic and political consequences of the current crisis. I would guess that more than a few IPE grads will be drafted into their respective national intelligence services in the coming years.

It has become cliche to say we are witnessing a global paradigm shift. But as the crisis plays out over the coming months, and political instability spreads, it will become ever more apparent that one cannot divorce economic conditions from national security. The risk is that this realization leads policymakers to adopt mercantilist policies and abandon multilateral cooperation. Amidst growing protests, the difficulty policymakers face in fashioning a global consensus on regulatory reform and economic stimulus only hardens. Upon this backdrop, the G20 meeting in London develops an even greater sense of urgency. Our leaders must sieze the moment. Their window may be closing.

That Was The Week That Was

Politique
-G20 finance ministers begin a tense weekend in the south of England amidst deep divisions over the way forward.

-The US deploys a warship to the South China Sea following a maritime incident between an unarmed US surveillance boat and five Chinese naval vessels, Wen Jiabao bangs the drum on US Treasuries...and these two things are related (see how things tie together so nicely?)

-Pakistan is on the verge of: a) another military coup, b) an unlikely political compromise, c) utter collapse.

Economia
-Switzerland moved to devalue the franc, raising fears of a "currency war" (i.e. competitive devaluations). It also reluctantly agreed to reform its bank secrecy laws and increase its cooperation on tax evasion.

-Reuters had an interesting report on the unusually sharp dissent within the US Federal Reserve over the bank's actions in response to the crisis.

-Bernard Madoff plead guilty to 11 charges related to his $50bn ponzi scheme, including securities fraud, mail fraud, money laundering and perjury. Sentencing is June 16.

The Rest
-Santino the chimpanzee has led scientists to question whether premeditation is in fact a uniquely human trait.

-Benoit Faiveley visits the last Palestinian keffiyeh factory in Hebron for Monocle (side note- its ironic that an essentially protectionist peace is sponsored by UK Trade & Investment)

-Alexander Lobrano explores Paris v. New York Eating (hint: he misses NYC). He then turns the tables in New York v. Paris Eating (hint: he misses Paris).

National priorities for the G20 meeting in London

The FT has a terrific interactive graphic outlining the priorities of each country at the April 2 G20 meeting in London. Build your own issue-linkages boys and girls!

Yet More Quotes To Ponder

The first comes from a piece by Yves Smith in which he quotes at length from another piece by Willem Buiter which argues that we should embrace active re-regulation now, risk over-regulation, rather than waiting to get it right. (Notice how this ties in well with the Geithner quote below? That's continuity, folks). First Yves:

Given the considerable costs [financial] innovation hath wrought, the calls
to shackle bankers seem completely warranted. If any other class had done this
much damage, they'd almost certainly be in jail.

Then a few more great lines from Buiter:

Self-regulation is to regulation as self-importance is to importance. The
notion that markets, including financial markets could be self-regulating, by
properly incentivising CEOs and Boards of Directors and through
market-discipline, is prima facie suspect. We decide to regulate markets because
of market failure. Then we let the market regulate the market. This is an
invisible hand too far.

The European political leadership seems to agree, and their agenda at the upcoming G20 is going to reflect this fact. Hold on to yer hats: the winds of regulation is blowin'.

East Asia's role in the emerging post-crisis governance paradigm

In a piece on Vox EU, Hadi Soesastro argues that East Asian countries should seize the opportunity afforded by the G20 and integrate their strategic interests and influence into the emerging post-crisis governance paradigm.

The crisis has created an opportunity for new players to bring their plights, interests, and aspirations to bear towards more inclusive global efforts to resolve it.

He argues that East Asia's inward focus over the past decade (with the big exception of China) has limited the region's collective influence and ability to project its strategic interests onto the global economic governance structure. Soesastro points specifically to the creation of a regional monetary fund, borne out of the collective sense of injustice at the hands of the IMF following the East Asian financial crisis.

He also believes, more broadly, that the focus should not be on the reform of existing international institutions. Global governance would instead be more effective if based on regional arrangements that coalesce the interests of developed, emerging and least developed economies within a geographic area. He points to efforts already underway within Latin America and the CIS to develop regional agendas for the G20 forum.

Finally, he identifies the G20 as a vehicle for China to increase its participation in global economic governance:

East Asia’s strategic participation in the G20 provides a framework for China to play an increased role – as a key member of the regional community – in the recovery of the global economy and in shaping global economic governance. In the Chinese language, the word “crisis” is made up aptly of the characters for “danger” and “opportunity”.

Soesastro's rallying cry for East Asia reflects a growing consensus that the G8 has become irrelevant and the post-crisis economic governance paradigm must be inclusive of a broader range of stakeholders, particularly those whose economic power far outweighs their political representation under the current global regime. If macroeconomic imbalances have played a central role in the crisis, the representatives of one half of that equation (i.e. Asian savings, which I know is a horrible oversimplification) should undoubtedly play as large a role in resolving the crisis as any party from the other side of the ledger. Further, trade is vital to East Asian economic growth and integration. Having a vocal advocate for open trade at the negotiating table, at a time when many of the major western countries are swinging towards protectionism, is of paramount importance to preserving the free trade consensus.

While I am skeptical of the ease with which Soesastro envisions a regional convergence of interests on issues like trade and investment (will China's interests always converge so neatly with Japan's?), he nonetheless highlights the enormous opportunity previously marginalized countries are provided by the crisis. Regions like East Asia can exert their collective influence to refashion global economic governance more in line with their own strategic interests. They can also play a vital role in preserving the open flow of trade and capital that has been so vital their own development.

The Debate Continues...

...on protectionism. First off we have the indefatiguable free-trade defender Jagdish Bhagwati who is, well, defending free trade. Even if the US enacted measures that were WTO-consistent, Bhagwati points out that other countries could do the same:

Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of aircraft away from Boeing to Airbus, and of nuclear reactors from American to French companies. The response would, of course, be for the enraged US congressmen to start enacting their own retaliation. The game would become lively.

In the interest of balance, I point you to a column by Oxfam's Duncan Green that argues that protectionism is not all bad, particularly for developing countries. I had the pleasure of having Duncan give a guest lecture in one of my graduate school classes - he offered a refreshingly blunt assessment of what it was like to work for an NGO, both good and bad.

As far as his argument goes, I think he's in good intellectual company when he points out that the poorest developing countries may need trade barriers to help them escape from a poverty trap. I think the well-respected development economist Paul Collier argues as much in The Bottom Billion. To be fair, however, we've been focusing our criticism on the Buy America, Buy China and Buy India type policies enacted by members of the G20. For these countries, at least, Duncan thinks protectionism is a rotten idea.

...and on fiscal stimulus. There's no end to the material provided by all sides of this lively discussion, but I particularly enjoyed this sarcastic op-ed by Benn Steil:

Citing Keynes gives us special licence to talk economics without using any. To paraphrase the lawyers’ dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes – and to great effect.

I think that Keynes is right when it comes to the need compensate for market downturns through active policy measures, rather than simply waiting things out, and Stein takes Keynes' quote about how "in the long run we are dead" out of context. But his target is not so much some long-dead economist but rather the people who are inclined to use the name of some long-dead economist as justification for spending our money. Just because there is a clear need to "do something" significant doesn't mean our legislators should be given a free reign. With huge stimulus packages being proposed by almost every major Western government, it has become more important than ever to ensure that the money is A) being spent on what's being promised, B) having the effect that's promised, and C) not mortgaging our financial future in the process.

Easier said than done.

Update: Brad DeLong retorts to the Steil piece.

VoxEU's Global Crisis Debate

VoxEU.org has a new initiative aimed at influencing the agenda of the next G20 meeting in April. Good for them. It's great to see the acedemia harnessing the internets to take seriously the issues facing our global economy.

However, in the event that they influence the ideas put forward by the G20, there's no guarantee that our political leaders will actually, ya know, do anything about it.

India Toys With Protectionism

For those you with short memories: a reminder about the G20 meeting from late 2008. Among the many fine words put forward following the November summit, there is one collection that seems worth revisiting. Declaration #13 reads (ahem):

We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.

Given the near-universal consensus on the detrimental contagion effects that protectionist measures have on global trade and material well-being, this was not particularly earth-shattering. Still, it was nice to see our political leaders re-affirming their commitment to...

Oh bugger! it took only three days before we heard serious talk in America about bailing out the automotive industry. This was followed shortly by the lawmakers considering a "buy US steel provision" for TARP funds. Meanwhile, in China, there is the small matter of currency manipulation and using the fiscal stimulus plan to promote domestic industries.

Not to be outdone, India has stepped up to the protectionist plate (wicket?) to take a few swings. Yesterday, India's government banned Chinese toy imports for six months - all six which fall into the twelve month period of no-import barriers promised above. From Free Exchange:

What the [Indian] government is thinking is unclear. In a grave speech at the G20 meeting in November, India’s prime minister urged the group to "forestall any protectionist tendencies which always surface in times of recession". The G20 seems to take India seriously. But India doesn’t seem to feel the same way about the G20.

Unfortunately, the same can be said for many of the G20's members. Of course, if all Chinese toys posed a serious health hazard in some way maybe this could be justified. But is it likely that all Chinese toys are dangerous? If so, India's government should be presenting their evidence to the WTO, not taking the path of least domestic political resistance and implementing a complete ban. Incidentally, this is also the path towards a trade war with one of the world's largest exporters.

Now I'm guessing the toy industry does not represent a significant portion of China's GDP, but that's not really the point. As The Economist's in-depth look at the infamous Smoot-Hawley bill of 1930 made clear, the real damage comes from how such laws sour trade relations, leading to retaliatory effects. Just look at what happened last week with French cheese.

So let's leave aside for the moment how such actions undermine the G20 and provide yet further evidence for the calculated hypocrisy of our political leadership. The real danger is that tariffs/bans on stuffed kittens and fancy cheese are the first snowballs that kick off an avalanche of protectionism that smothers trade and damages geopolitical relations. It is precisely now, in this economic turmoil, when international cooperation is needed more than ever.