Reflections after the G20 meeting in Mexico

In diplomatic language there is a difference between saying “event B cannot happen because condition A is not fulfilled” and saying “event B will happen if – or even as soon as – condition A is fulfilled”. This distinction helps understand what happened last weekend in the G20 ministerial meeting in Mexico City. A few hours ahead of the meeting, an agreement on a replenishment of IMF resources of the size asked by Managing Director Christine Lagarde (a “global firewall”), was a non-starter. The US, followed by almost everybody not located between the Atlantic and the Urals, opposed the move arguing that Europe should mobilize its resources first – in the implicit assumption that new IMF money would be used, first and foremost, to shore up European ailing sovereigns. In other words, general feelings were in the nature of the type-1 statement. Instead, what came out from the meeting sounded more like type-2. The passage from the final communiqué (http://www.g20mexico.org/es/centro-de-noticias/discursos/235-communique-meeting-of-finance-ministers-and-central-bank-governors) is worth reading:

“We are reviewing options, as requested by Leaders (at the Cannes meeting, I add), to ensure resources for the IMF could be mobilized in a timely manner. We reaffirmed our commitment that the IMF should remain a quota-based institution and agreed that a feasible way to increase IMF resources in the short-run is through bilateral borrowing and note purchase agreements with a broad range of IMF members. These resources will be available for the whole membership of the IMF, and not earmarked for any particular region. Adequate risk mitigation features and conditionality would apply, as approved by the IMF Board. Progress on this strategy will be reviewed at the next Ministerial meeting in April.”

More than written words, what impresses is a series of concentric statements around and after the meeting. As usual, Japan sounded the most eager to go ahead, but also Russia talked on the same line, and even China was unusually forthcoming, in the words of central bank governor Zhou: “China is an important member of the G20 … and will do its part…”. Brazil finance minister Guido Mantega, whose Genoese ascendancy probably explains a taste for bargain and compromise, linked emerging country financial support to further progress on IMF representation and governance. Here comes the real issue: this IMF replenishment offers emerging countries a rare chance to enhance their relevance as global partners, attaining two goals in one: strengthening the G20 and their own position in it.

The Mexican meeting unexpectedly achieved an important result: shifting expectations on future G20 meetings (another ministerial in Washington in April, followed by a Summit in the Mexican Baja California in June) from gridlock to agreement. This does not yet mean that agreement will automatically happen: an initial move from Europe (read, Germany) is still needed. Not much, probably; a temporary overlap of the eurozone’s temporary rescue facility (EFSF) with the forthcoming permanent one (ESM) – a choice not opposed by core Europe but so far considered by Germany “unnecessary” – may be enough. The way players are positioned at present suggests progress is possible. The German stance is driven by conflicting forces: on the one hand, a desire to build effective financial firewalls to relief market tensions, also in the interest of an exposed German financial sector; on the other, two countervailing caveats: that of discouraging reform in the European periphery and of alienating domestic public opinions, who loathe open ended support to weaker EU members. The point to be understood, however, is that success on strengthening the IMF would help dispel both fears. The first, because the concession of IMF support, in Europe and elsewhere, will be accompanied by strong conditionality; all the more so in Europe, where a German inspired “fiscal compact” has just been approved. The second because a concerted IMF replenishment, mobilising resources of wealthy emerging nations, would contribute to reduce the burden on German and other core EU taxpayers. Two results in one, also on the European side.

Taking a more general perspective and looking beyond the immediate concerns, an agreement on IMF resources would also help in two ways:

1. Salvaging, at least for now, the G20 from a slide into irrelevance. Observers hailed the creation of the G20 summit in 2008 and welcomed its crisis management successes between November 2008 (Washington meeting) and September 2009 (Pittsburgh). After this, its weight declined steadily, as a joint paper with Jean Pisani Ferry, forthcoming in the Bruegel website [1], documents. Setting up a global financial firewall, with emerging countries joining forces with the G7 in preserving global financial stability, would be a tonic for the group’s credibility and confirm that the 2008 decision was a right one.
2. Facilitating a further evolution in the role of the IMF. The IMF has changed a lot in recent years, but its transition from custodian of a system of adjustable exchange rate parities (and financier of temporary imbalances among nations) to guardian of global macro-financial stability (and, accordingly, lender-of-last-resort) was never complete. The latter would entail a much greater flexibility in the Fund’s operational toolkit, including, over time, a presence in the financial markets and in support of illiquid globally relevant financial institutions. The Fund’s articles of agreement, requiring it to act “with or through” national fiscal or monetary agencies, are not necessarily an impediment. The ESM treaty recently agreed among euro area governments contemplates such role fully, prescribing that the European “fund” will not only lend to nations, but also intervene in primary and secondary securities markets and recapitalise banks. The treaty also stipulates that the ESM will intervene, “whenever appropriate and possible”, together with the IMF. A collaboration that may, in the end, prove helpful not only for Europe, but for the IMF itself.

 

[1] The G20: characters in search of an author, by I. Angeloni and J. Pisani Ferry; Bruegel Working Papers, forthcoming.