Why it’s time to give up on G20: Kohler

It’s time to give up on the G20 as a decision-making forum – it really is a complete waste of time. It should go back to being a networking and social event for finance ministers, and leave it at that.

Apparently the weekend meeting of G20 finance ministers in Paris involved tense, all-night negotiations with China over the wording of the communiqué, which was eventually signed off mid-morning on Saturday.

They were arguing about the “indicative indicators” to use when evaluating economic imbalances that lay at the heart of the global financial crisis. They weren’t debating what to do about the imbalances, mind you, but how to evaluate them.

The “internal indicators” – those around public deficits and debt, as well as private savings, were easily ticked off. They’re really only an issue for the West – America, Europe and Japan – and none of them has any problem with transparency.

The G20 screeched to a halt when it came to so-called external indicators – trade balances and exchange rates – because China didn’t want them in. The host, and French finance minister, Christine Lagarde, was desperate that the talks wouldn’t end up in failure like the last G20 meeting in Seoul, and wouldn’t let anyone leave the room until something was signed.

So through hours of painstaking, nit-picking negotiations with the Chinese delegation they drafted a 53-word sentence that did actually contain the phrase “exchange rate”. Here it is:

“While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.”

Christine Lagarde confirmed later that the phrase “foreign exchange reserves” had been dropped at China’s insistence.

The idea is that they will now work towards agreeing on what the “indicative guidelines” are at the next meeting in Washington in April. After what happened on Friday night and Saturday morning that is wildly ambitious.

The G20 was a finance ministers’ discussion group started up in 1999 in Berlin, but in the depths of the crisis in 2008 it was decided to turn into a leaders’ summit, effectively superseding the G8, which in turn had superseded the G6 through the addition of Canada and Russia. The G6 had begun in 1975 following the oil crisis.

In 1975 China was on the tail end of the Mao Zedong’s cultural revolution and didn’t need to be included in any G’s at all. But in 2008, following the credit crisis, it had to be in. After all, its vast trade surpluses recycled back into US dollars had lubricated the credit boom.

And it had to be G20 rather than G9 because if the G8 had simply been expanded to include China, then India, Brazil, South Korea, South Africa and Indonesia – not to mention Australia – would have bitterly complained. So G20 it was.

In 2008 all 20 readily agreed to stimulate their economies because they were already doing it. At that meeting in Washington the G20 was made to seem a decisive, decision-making body because they decided to do what they were already doing, so that many separate, desperate fiscal expansions were made to look like a co-ordinated global action.

The next year in Pittsburgh they were still basking in the glow on their decisiveness and decided to formally replace the G8 with the G20. It was Kevin Rudd’s finest hour; he had been lobbying for this for two years and finally was able to declare that Australia finally had a permanent seat at the global table.

Within a year Rudd had been sacked and it was clear that the G20 was too big. At the 2010 meeting in Seoul, with the global economy recovering, it was time to move onto the dealing with causes of the crisis rather than alleviating its effects, but the presence of the surplus countries, especially China, doomed it to failure.

And so they come to Paris in February 2011 for another go at it. This time, ta-da! Success! A communiqué is issued that allows the French to say trade balance is an indicator and allows the Chinese to say it is not – the statement is merely a guideline, not a target.

Twenty is simply too many people in a room, especially when half of them are jet-lagged. International agreements are best conducted one-on-one, as the flourishing of bilateral trade agreements in recent years has demonstrated.

And with riots spreading across the Middle East over the lack of democracy, sparked by high unemployment, China will be in even less of a hurry to let its currency rise and make its factories uncompetitive in the interests of ending global imbalances.

This article first appeared on Business Spectator.