GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

As the crisis began spreading across the globe, the G20 helped avoid descent into a second Great Depression. It marshaled the large economies to coordinate their stimulus programs, assigned the IMF a large role in carrying out rescues, and helped avert egregious protectionism. On that alone, the institution’s balance sheet is positive, and at a minimum it will continue to provide insurance against the next financial crisis. Though it is hard to discern how many of these positive outcomes owe to the G20 and how much would have happened anyway, the group clearly demonstrated its usefulness in crisis. It has also shown glimpses of its longer-term potential – revising the roles and structures of major institutions and setting the global economic agenda. If it avoids the pitfalls of overpromise, overreach, and bureaucratization, and bridges advanced and emerging countries’ interests, it can establish confidence in the new world order and help build a viable economic architecture for the 21st century.

The G20 must first and foremost avert the temptation to be all things to all nations and instead keep its eye on the ball – the systemic global policy issues short- and long-term- that affect all nations and where major coordinated reforms are needed. Though global imbalances and currency tensions are rightly part of the discussion, the emphasis should be on highlighting and dealing with the domestic policy failures that are the real cause of the pattern rather than look for illusory solutions in new international monetary arrangements or for quick fixes from the mutual assessment process. Strengthening the world trading system will take much more than another pledge to conclude Doha: a reform of the WTO and its negotiations modalities. Much work also remains to be done to establish the broad common principles on financial regulation so as to avert arbitrage and work together when multinational banks start failing. These core issues must be set right before the agenda is broadened further.

Much will have to get done by each member, at home. While economic linkages have become global, economic fixes are local. Going forward, Europe and the United States must look deep within, much like emerging markets had to do in facing up to their crises (Suominen 2011). The cost of the Eurozone’s common currency is greater fiscal integration and enforcement regime; the price for future economic dynamism is flexible labor markets and curtailed welfare  states. In America, the failure of the budget super committee to reach agreement only increased the urgency to free the world’s leading economy from its exploding debt load.

And yet, getting to growth in the interdependent modern world takes far more give-and-take. China, India, Brazil and other emerging market economies know that advanced nations’ recovery and global rebalancing are in their economic self-interest, but now must act on that understanding. By paving the way to growth, they would show the global leadership they seek – which, after all, is not about new seats in international institutions, but about stepping up to the plate at the world’s hour of need.

As it faces up to the global challenges, the G20 must avoid becoming a white elephant, the fate of all too many international endeavors. Repeated failures by the G20 to meet its commitments on rebalancing, the Doha Round, financial regulations, and other policy areas will quickly chip away at the group’s credibility and relegate it to irrelevance. The leaders should not underestimate such a prospect. The key factor between success and failure is leadership. Just like the G5 or G7, the G20 requires leadership for generating useful policy ideas and building support for action around them. And just like in the past, there are only a handful of members that can swing the big decisions. Of those, the United States is still by far the most important and the only plausible leader. And as in the past, it leads best by example and vigor of its economy. On that score, it now has a long way to go.