The meeting of the Group of Eight, a club of the world’s most advanced industrialized democracies, kicks off in Deauville, France, tomorrow. Topping the agenda are the usual issues related to nuclear nonproliferation, trade and aid commitments to Africa. But this year’s summit comes as the world still struggles to recover from the financial crisis and budgets remain tight. That will make securing development commitments and consensus more difficult.
Do not expect any “big ideas” or major overhauls of the international financial system – or a “new Bretton Woods” agreement on monetary relations, as French President Nicolas Sarkozy called for when he dropped in on the World Economic Forum in Davos. Expect a more moderate agenda. The G-8, after all, took a backseat role to the G-20 after the global recession, in order to bring China, India, Brazil and other emerging markets to the table. But to reach firm commitments and reform the bank sector – most of the world’s major banks reside in G-8 member countries – the G-8 remains the more effective club. Its members have shared values, while its small size makes consensus more achievable. Still, banking reform is not likely to be high on the list this time around – and real power now lies with the Financial Stability Board, an institution created in April 2009 to address the global financial system.
Some topics expected to top this year’s G-8 agenda:
• Budgetary Reforms: In the wake of yet another bailout request from Greece — the country that tipped the scales of the euro zone deficit — the G-8 will focus on how to rescue a world economy still reeling from the 2008 recession. To that end, members will pay lip service to coordinating their macroeconomic policies, as well as correcting global imbalances between surplus and deficit countries. The biggest culprit has been spendthrift behavior in developed countries combined with excessive savings in emerging markets, which has led to mounting deficits and unbalanced budgets.
But there are few mechanisms to enforce fiscal discipline. The peer review process and accountability mechanisms lack sufficient teeth, allowing members to shirk on previously made promises. And members remain divided on the relative responsibilities of surplus countries like Germany and Japan versus deficit countries, namely the United States, which along with other members made pledges at last year’s G-8 summit to cut deficits. “At the end of the day, it’s internal pressure that will get the United States to move toward establishing a medium-term fiscal plan,” said Steven Dunaway, an adjunct senior fellow for international economics at the Council on Foreign Relations, not pressure brought to bear by bodies like the G-8 or G-20.
That said, the G-20 may be the more appropriate forum to address macroeconomic problems – global imbalance of payments, China’s exchange rate, etc. – since emerging countries are not party to the G-8. To contain the 2008 financial crisis, it was the G-20, not the G-8, which played a more constructive and hands-on role in lowering interest rates, implementing fiscal stimulus, and preventing members from falling back on protectionist practices. The G-8 is used more as a mechanism for traditional industrialized countries to coordinate their policies vis-à-vis emerging markets like China and India, as well as create movement on trade negotiations at the Doha round. “With few exceptions,” Bruce Jones of the Brookings Institution wrote last year, “China, India, Brazil, and South Africa are larger trading partners to the developing countries than any G-8 member, and on economic investment, China is already spending more money in Africa than the entire G-8 put together.”
• IMF and French Politics. Expect some internal jostling from the host country ahead of its upcoming presidential election. Candidates, in addition to President Sarkozy, will use the occasion as a campaign photo-op now that the election has been thrown into disarray after the recent arrest of the likely Socialist Party candidate, Dominique Strauss-Kahn, who resigned his chairmanship of the International Monetary Fund after he was charged with raping a hotel maid in New York. One of the most discussed topics at the G-8 may be selecting a new chairman of the IMF (the Europeans will press to have the slot filled by another European) – the summit is expected to serve as a platform to put forth candidates.
• Internet Reform. Sarkozy is expected to make a push for taxing international Internet companies. He has voiced concerns that these companies do business in France and benefit from the government’s telecommunications infrastructure but evade paying French taxes and shift profits overseas. On the table will be issues of net neutrality, online privacy, and protecting intellectual property, a sensitive issue that has pit Google against some French publishers. Sarkozy launched a pre-summit internet forum yesterday with CEOs of several Internet and social networking firms in attendance, including Facebook, Google and Amazon. Few experts, however, expect much progress to be made on this front.
• Aid to Africa/Arab World: Institutions like the World Bank are eager to keep the G-8 afloat because securing aid commitments from the G-20 is cumbersome and impractical, given its members’ diverse priorities. In France, expect calls for a greater commitment of aid to Africa as well as the Arab world, given the political, economic, and social upheavals of the past few months. But do not expect a Marshall Plan-sized package of assistance for the Arab world, as evidenced by President Obama’s recent speech on the Middle East calling for $1 billion of debt forgiveness and $1 billion in loans to finance infrastructure for Egypt, a country with $30 billion in debt.
There will also be pressure on G-8 members to follow through on commitments made at past summits, especially in Gleneagles, Scotland, in 2005 (where aid to Africa took center stage). That summit called on members to pledge 0.7 percent of their national incomes as overseas aid by 2015, and boost development assistance by $50 billion by 2010. One, the development charity headed by Bono, recently accused the governments of France, Italy, and Germany of reneging on up to $7 billion in aid Africa pledged in 2005.
“Now more than anything else [the G-8 is] a talking shop,” said Jacob Funk Kirkegaard, a Research Fellow with the Peter G. Peterson Institute for International Economics. “There is no stigma attached with not fulfilling your Gleneagles commitments.” Interestingly, it's outside groups and civil society, not the members themselves (though Canada has preached a bit) that are really putting pressure on G-8 members to follow through.
G-8 summits are historically lightning rods for activism and criticism of the closed nature of Western financial institutions, especially their hypocrisy when it comes to providing assistance to the developing world. Some NGOs have accused the G-8 of “cooking the books” to cover up an $18 billion shortfall in aid. In expectation of protests, the Normandy town of Deauville will deploy 12,000 police. The G-8 pledged $100 billion in aid by 2020 but as President Sarkozy rightfully asks: “With budgetary deficits, how do you finance this?”
To answer this and other pressing questions on global finance and development, we will likely have to wait until November, when the G-20 meets.
G-8 Summit Not Right Forum To Decide IMF Succession –German Govt (The Wall Street Journal)
World Bank Sets $6 Billion in Aid for Egypt, Tunisia (AFP)