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Greek Dra(ch)ma at the G20: kicking the Cannes down the road, but all roads lead to ... Rome

Written by Dirk Willem te Velde

What was agreed in Cannes?

I recently asked whether the G20 could come to the rescue to solve yet another crisis. The general assessment now is that it kicked Cannes down the road instead.

There were very few concrete actions agreed at last week’s G20 summit, and hardly any that would contribute to global growth. There will be more firepower for the International Monetary Fund, but the details will only be decided at a future G20 meeting. It is likely to include a boost to the IMF of around US$250 billion, and an equivalent increase in special drawing rights (SDRs), which the eurozone could pool. But, significantly, whilst the Greeks still need to agree a €130 billion bail-out, the G20 summit put the spotlight on Italy, which is facing an ever increasing refinancing rate on its almost €2 trillion debt.

The meeting argued for avoiding protectionism, so the rise in export restrictions and impending protectionism imposed through the reform of the European Union’s Generalised System of Preferences (GSP) does not bode well (although the need to ‘enhance exchange rate flexibility’ would help). Perhaps the upcoming World Trade Organization ministerial in December can explore the ‘credible approaches to furthering negotiations, including the issues of concern for Least Developed Countries’, consistent with the Cameron report on global governance, but what are these approaches?

The G20 meeting further reaffirmed the need to phase-out ‘inefficient fossil fuel subsidies that encourage wasteful consumption, while providing targeted support for the poorest’. Indeed, the search for green growth is high on the agenda of the Rio+20 conference (with speculation that it may now take place days after the next G20 leader’s meeting) and the Cameron report suggests RiO+20 and the G20 should work together on high-level goals.

On development the G20 suggested that ‘economic shocks affect disproportionately the most vulnerable’. We discussed development consequences of a growth slowdown with the IMF in a recent roundtable and, even though the IMF and G20 are busy trying to stem the eurozone crisis, the G20 could have emphasised the need to urgently address the effects on poorer countries. The work of the High Level Panel on Infrastructure was also mentioned, which has highlighted 11 exemplary infrastructure projects for funding and decided to ‘invest in and support research and development of agriculture productivity’ needed to feed 7 billion people today and some 9 billion by 2050. The meeting further discussed Bill Gates’ report on innovative financing options – which, for example, suggests that sovereign wealth funds (SWFs) should be drawn more into financing development activities – as well as highlighting the importance of traditional aid and the development contributions of emerging powers ahead of the aid effectiveness meeting in Busan later this month.

Settling the eurozone woes?

And so a country of 11 million took centre stage. Greece itself will not shake the world’s economic fundamentals, even though political statements (e.g. on the possibility of a referendum) have introduced global market volatility. A disorderly default may shut banks for weeks and cut Greek consumption by half, but growth is likely to resume soon afterwards, as it did in Argentina in the 2000s.

Cuts to the face value of debt will be felt by bond holders, but anything in the order of €200bn can be absorbed with modest actions. The current European Financial Stability Fund (EFSF) is already at €440bn, and only half of that is needed for Greece, Portugal and Ireland. However, the real problem – now that Germany and France are talking turkey on Greece leaving the euro club – is that default discussions have increased the refinancing rate of Italian debt to beyond 6.5%, a rate at which the peripheral eurozone has had to call in the IMF.

Italy has so far been incapable of producing the long-term structural reforms it needs to grow and regain market confidence. This is worrying since Italian debt is close to €2 trillion and EFSF bonds are guaranteed for 20% by Italy. It is beyond economic belief that Germany and the Netherlands as eurozone surplus countries and the European Central Bank are not more forthcoming. No wonder emerging powers are concerned and prefer to wait for clearer European signals before they offer help.

There is talk that a €2 trillion fire wall around Greece is needed. This is 20% of eurozone gross domestic product and 5% of world GDP, and some have already put the costs of a Greek default at 2% of eurozone GDP or 0.5% of world GDP. Such contagion and lower growth will have severe knock on effects on the poorest countries.

A development agenda consistent with the G20’s agenda for strong, sustainable and balanced growth

The pillars-of-growth approach to development was initiated in Seoul, but the Cannes meeting did little to suggest the G20 wanted to continue in this way. Arguably, concrete action plans covering many issues are better than bland general paragraphs, but the risks of losing control and relevance are still great.

Four changes could benefit the G20’s development agenda, and set firm challenges to be achieved by the next G20 leaders’ meeting in Los Cabos:

  1. The agenda should be limited to a few topics that are directly consistent with the G20’s plan for strong, sustainable and balanced growth. The G20 is an informal network of networks discussing financial and economic issues, and should focus within its comparative advantage including trade, investment and growth (including green growth). After the rise of the emerging powers, now even low-income countries can contribute to global rebalancing. Our macro-economic estimations show that an infrastructure stimulus of US$50bn in Africa (financed by the G20 proportional to the size of the announced stimulus packages in 2009) would boost euro area export volumes by a cumulative US$12.9bn after 5 years. And, thanks to increased growth in the poorest countries, exports by the EU27 to 36 low-income countries soared by 125% over the past decade, equivalent to an additional US$12bn each year.
  2. At the same time, the scope of the agenda should be widened for this narrower set of topics. Last year we argued there were four areas where the G20 affects development: i) the G20’s own actions to co-ordinate growth policies; ii) promoting a greater development focus of the G20 core policies (e.g. structural reforms); iii) promoting better G20 external policies directly relevant for development; and iii) supporting the growth plans of low-income countries. The G20 seems to have taken on board the latter, but only partially, and has progressed much less on the first three items. For example, the Centre for Economics and Business Research (CEBR) suggests a eurozone crisis could costs 2% of European GDP, so this could translate into a 0.5% growth effect for sub-Saharan Africa; or a small share of emerging-power SWFs could be channelled to African infrastructure with significant positive financial and economic returns.
  3. The agenda could more clearly spell out the roles and responsibility of various actors. For example, infrastructure financing is important for low-income countries, and this needs to be discussed directly amongst G20 officials, SWF representatives, private firms and developing country officials. Constituting a separate Panel is one idea, but a more integrated and structural approach could be useful to integrate the B20 more centrally on a limited set of ‘beyond-aid’ topics.
  4. Finally, it is important to improve the monitoring and feedback role countries outside the G20 – after all, the G20’s development agenda specifically aims to help these countries and increase the G20’s legitimacy globally. The Commonwealth Heads of Governments meeting that took place just before the G20 suggested a Commonwealth role in such meetings, which would enable developing countries to help select topics relevant for growth and development and then monitor progress. So far, the voices of low-income countries at the G20 have been overshadowed by other issues.