by Gordon Brown
I had tried to fend off the tax-haven dispute in a series of phone calls to the leaders in advance of the summit, but with no success. Even an attempt the night before at last-minute talks between the French and Chinese at Sarkozy’s hotel – helpfully called the Mandarin – failed. The Chinese had refused to turn up until the French issued a joint diplomatic statement moderating their position on Tibet. No agreement could be reached and the next morning, as the G20 got under way, Sarkozy repeated his threat that he would walk out if the communiqué did not include a declaration on tax clampdowns. The Chinese refused to sign such a communiqué. All morning, we laboured on a compromise; it was to no avail. So too was an eloquent plea from President Obama that at this decisive moment in world history, we could not fail to find a way forward. ‘Let’s get this all in some kind of perspective guys,’ Obama said at one point.
As chairman of the meeting, I was being sent regular notes saying that Premier Wen would not budge and President Sarkozy was indeed serious about walking out. During the lunch the tension between the French and Chinese presidents grew. We needed to think laterally. I phoned the secretary general of the Organisation for Economic Cooperation and Development (OECD), Angel Gurría, to put a proposal to him in advance of the second session, which was just about to begin. I proposed that that the OECD issue a statement pledging the very action on tax havens the Chinese were refusing to accept. Fortunately, the secretary general was up for this. I then put to the G20 a proposal that the OECD would take all the action necessary on tax havens. The Chinese got their way; there was no declaration at the G20. The French had got their way; there was a tax declaration. To Sarkozy’s satisfaction, the declaration was issued from Paris, where the OECD was located. A press statement would be released there to coincide with our communiqué.
We managed to complete our full discussions by 3 p.m., and had there been more photocopying machines to print sufficient copies of the communiqué we could have held our press conference earlier. In the event, our press conference was at 4 p.m., with individual press conferences from other leaders choreographed to follow. The day had been harder than expected, and for reasons we had not anticipated, but the outcome was historic. The communiqué spoke of ‘the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times’. As I told the press conference, our agreement showed that in a global economy, prosperity was indivisible and that to be sustained it had to be shared. We trebled the resources countries made available to the IMF to $750 billion, with the IMF itself adding a further $250 billion to that figure in so-called Special Drawing Rights – a tool for increasing liquidity in a country’s currency reserves – and $100 billion was set aside by the Multilateral Development Banks to invest in low-income countries. With $250 billion of trade credits, we did everything in our power to avoid what had bedevilled world recovery in the 1930s: protectionism. Following this, central banks rapidly cut interest rates, bringing them close to zero, and increased the purchase of assets to prop up a frail banking sector and incentivise lending and growth. What I had called for – a worldwide fiscal stimulus – was implemented in both advanced and emerging economies: in 2009 and 2010, the injection of new spending and tax cuts averaged almost 2 per cent of national incomes.
Before the G20, world trade, global industrial production and stock market valuations had all declined faster than during the onset of the 1930s Great Depression, and we had been heading for a repeat. After the G20 there was a sharp turnaround: the world economy grew 4.5 per cent during the second half of the year, and 5 per cent in 2010. Why? Because, as Christina Romer, the chair of the US Council of Economic Advisers, explained: ‘While the economic downturn of 2008–9 was directly comparable to the 1930s, the policy responses have been vastly different.’ In the 1930s, it took six years for world output to return to previous levels; but acting together, we had achieved the turnaround within one. I felt reassured by the World Bank’s verdict that the London summit had ‘broken the fall’ of the global economy. It is likely to go down in history as the moment when the international community united to stop a slide into a depression.
Over the summer, as I worked on the G20 Global Action Plan which would be announced in September, I again met Barack Obama at the UN in New York and then in Pittsburgh. Once again the media was primarily interested in how much time he allocated to me. It did not seem to matter to them that throughout the entire first day at the UN I was sitting next to him and we were in continuous conversation. Out of New York, the BBC’s coverage of our attempts to revive the world economy was reduced to a ridiculous story that I had been snubbed by him. When we got to the Pittsburgh G20, the normally placid Obama was calling the British press ‘savages’. His chief of staff remonstrated to his good friend and my adviser David Muir: ‘You have to get your press pack under control. They are a f***ing disgrace.’
The Pittsburgh G20 approved what was now called a ‘growth compact’ to be driven by what was termed the IMF’s ‘mutual assessment process’, or MAP. MAP examined the growth and employment potential of individual economies and the world economy as a whole. In their first report the IMF demonstrated that over the next four years global coordination could achieve 5.75 per cent higher global growth, create up to 50 million additional jobs and take 90 million out of poverty. But despite the scale of our ambition, the momentum for joint action we had fashioned in April 2009 was already flagging. For want of such coordination, growth turned out to be 3 per cent lower than it might have been, and those 50 million extra jobs did not materialise. A bold South Korean-led initiative of 2010, in which China and America would limit each other’s trade deficits and surpluses to 4 per cent, was stillborn. So too was every effort to secure a world trade agreement and to reverse the rising tide of protectionism.
Buoyed by our April success, I thought we could deliver the first global climate change treaty. Already global emissions of carbon dioxide in 2009 were almost 50 per cent above their 1990 level. Millions of hectares of forest were being lost every year, renewable water resources becoming scarcer, and small countries at risk of evacuation from coastal erosion. I was the first head of government to announce that I would attend the Copenhagen Climate Change Conference called for December 2009. Slowly but surely we managed to persuade other leaders to attend too, including Barack Obama. By the time we reached Copenhagen and with help from Hillary Clinton, the Americans had come on board for our proposed financial package that would offer up to $100 billion to crisis-hit countries to pay for mitigation and adaptation. But the format of the conference defied any reasonable chance of agreement. All 192 countries met in one session with no drafting committee or executive body. We should have seen the writing on the wall when, at the outset, the Chinese delegate challenged the right of the host, the Danish prime minister, who had invited us there, to chair the gathering.
The only procedure we were all agreed upon was that each leader would make a set speech to the conference. In mine I emphasised that scientific truths know no boundaries of ideology or politics and that I was not asking any country to suspend their national interest but to advance it more intelligently. And I called for common action: ‘not one block against another, not north against south, not rich against poor, but the first global alliance of 192 countries, a new alliance for the preservation of our planet’.
An event made up of 192 speeches was, as my friend Kevin Rudd, the Australian prime minister, put it, ‘floating in space’ – that is, going nowhere – so I proposed there and then that a smaller group of the more powerful countries meet as a G20-style executive, this time with far stronger representation than at a formal G20 from the poorest countries hit the hardest by climate change. Unhappy with what he saw as undue pressure on China to come to an agreement, the Chinese prime minister never attended this thirty-strong gathering, and when Angela Merkel proposed that the richest economies signal their own commitment to halving carbon usage by 2050, the Chinese delegate objected. His
country was entitled to veto this, he said, because China by 2050 would also be a high-income country. At that point, we had to prevent him and Kevin Rudd coming to blows.
The G20-style format gave way to a series of separate discussions. President Obama went to see the Chinese premier at his hotel. Unannounced, President Lula of Brazil, Prime Minister Singh of India and President Zuma of South Africa turned up in support of China. A patchwork of an agreement was hammered out. All countries would agree to report each year on how they were meeting their climate change targets. So the Copenhagen Accord was born. It instituted national carbon reduction plans, transparent reporting, some immediate help for poorer countries to adapt to and mitigate climate damage, and it agreed the need for further work, which I took forward, on a $100 billion plan to help the island states and other states facing drought and floods.
But Copenhagen’s stated objective had not been achieved: we could not agree on a legally binding treaty, nor even an overall framework that would give the world confidence that all countries would reduce their emissions. While in the early months of 2010 Angela Merkel and I tried to revive the climate change discussions, it was to no avail. It was to take until 2015 in Paris – and a deal between President Xi Jinping of China and Barack Obama – to secure a climate change agreement. Countries now have to show they are meeting their emissions target in a more transparent way, but the $100 billion a year promised to the crisis-hit countries for mitigation and adaptation has yet to materialise.
Global poverty – like growth and climate change – was a challenge that now required but did not receive the global coordination that had been so effective in preventing a world depression. Throughout the crisis I positioned Britain as a leader in global aid, because I believed that we should shine a light on the needs of the poor and inspire other advanced economies to do more to help poor countries vanquish poverty, illiteracy and disease. While most states cut their aid budgets in the wake of the crisis, I announced that Britain would honour in full its commitment to raising aid from the 0.26 per cent of national income that we inherited to 0.7 per cent. In the year we left office, we passed 0.6 per cent and were on track to achieve 0.7 per cent in 2013.
And yet there was still one major task – agreed at the April G20 in London – which would require collective global action too and which was essential if our work was to go beyond a rescue operation and make the global economy secure in the future.
Because the crisis had revealed so much of what was wrong with our financial system – its brittle structure, its excessive rewards, its lack of transparency – I wanted the post-2008 period to be as energetic a time for rebuilding and reform as the post-1945 period, which had produced the IMF, the World Bank, the Marshall Plan and the United Nations. These international institutions, which had been built in the 1940s for the era of separate national economies, were now out of line with the needs of an interdependent global economy where financial institutions worked across borders and were so internationally interconnected. At the suggestion of the Indian prime minister, the April summit agreed that I would head a review of the structure and role of the international institutions. I wanted the outdated Washington Consensus – which had become synonymous with neoliberalism – replaced by what I sometimes called a new London consensus, in which we explicitly abandoned the mindset of deregulation, privatisation and liberalisation at the core of economic policy in favour of a more balanced approach.
At London and then Pittsburgh we agreed, on paper at least, common global financial standards for bank capital and liquidity, including basic leverage ratios to prevent banks from risking their savers’ money in the absurd lending and trading practices that had been revealed by the crash. But I wanted to go further and create a global banking constitution that would set standards across the system to be applied in every financial centre in the world. I wanted an international early warning system to identify and head off future crises. I wanted a global growth strategy driven forward by a reformed IMF and World Bank, and the G20 bolstered with the staffing and representative membership necessary to make it what it said it was: the premier forum for economic cooperation.
In the end, delivering these proposals meant overcoming more obstacles than I had time left in government to surmount. And, just at the time I argued for enhanced cooperation, I found resistance to change was growing. The backlash from the banks came as early as November 2009 when in Britain we introduced a one-time levy on bank bonuses and it spread round the world.
The arguments for such a levy were compelling: banks had raised dividends, salaries and bonuses to jaw-dropping levels in the pre-crisis years. I recalled the Bank of England calculation that if British bankers had paid themselves 10 per cent less each year between 2000 and 2007, they would have had some £50 billion more capital to help them withstand the crisis – precisely the amount stumped up by British taxpayers for the emergency stabilisation of our banking system. Excesses in remuneration are not cost-free. We knew that we had to act before the bonus season early in 2010, and we had a special responsibility for banks funded by the taxpayer. In some instances, we were legally bound to meet contractual obligations on bonuses, but we had other means at our disposal than non-payment. In December 2009, Alistair Darling bravely demanded a 50 per cent tax on bank bonuses.
Of course, we were prepared for the familiar counter-argument to restricting bonuses: that, if Britain brought down remuneration while other countries did not, then whole companies would relocate. Switzerland became a much-quoted option and, as the Swiss told me, there were no plans there for changes in its remuneration rules. Prior to Alistair’s announcement I was reassured by one chief executive who told me that making money was his business but taxation was solely a matter for government. They would accept what government did. This position was maintained only until we announced the tax, at which point that bank, with others, threatened to leave the country.
We were under daily pressure to modify the tax, and to his credit Alistair refused to backdown. We were right to press on, and the eventual gain to the public purse from the tax was £1.2 billion. However, in this form, it had to be no more than a one-time boon as the banks swiftly restructured their remuneration packages, some converting bonuses into salaries, in order to avoid having to pay a similarly constructed tax in future.
There was a prize waiting to be grasped that I was still pursuing in the final weeks before I left office: a globally coordinated levy on the banking sector. Andrew Haldane of the Bank of England has estimated that in the three years after the crisis the largest UK lenders alone enjoyed a taxpayer subsidy worth £55 billion each year. It was only right that banks should play their part in insuring against future failures. At the G20 finance ministers’ meeting in November at St Andrews, I said that there were a number of ways we could protect taxpayers against the cost of a future banking crisis. The banks could be charged an insurance premium. We could require them to set aside so-called ‘contingent capital’. We could simply make provision for a better mechanism for resolving any crisis that would set out in advance their responsibilities for compensating the taxpayer. There could be a levy, either on transactions, assets or revenues. But any measure had to be universal: it could not work unless all the major financial centres imposed it.
While I had raised all the options, my own thinking on this revolved around a levy on banking assets. I privately estimated that Britain alone could raise £25 billion through this measure. But just the mention of a levy sparked a firestorm. Critics rushed to judgement assuming, wrongly, that I was proposing a levy on all financial transactions, the so-called Tobin tax (named after the American economist James Tobin). The US Treasury Secretary, Tim Geithner, immediately announced that he opposed a transactions tax. The initial response from Europe was equally discouraging. I had gone into the lion’s den and been mauled.
I could see a rocky time ahead as we continued to promote the global assets levy, but I was in no mood to give up. Over the next day or two, I t
elephoned all who had publicly criticised the proposal and asked them to look again in the cold light of day at all the options I had put forward. I left them in no doubt that I would be stepping up my campaign and would seek to win public support for the levy. We could not stand still, act as if nothing had happened, and leave the banks to pick off governments one by one, with the inevitable result that no action would follow.
By the beginning of 2010 what had been dismissed as a wayward idea started to gain traction. Tim Geithner telephoned me to say the Americans were considering a proposal that the banks contribute to an insurance scheme. This, as President Obama later proposed, would recoup the costs of the Federal government’s TARP programme.
President Sarkozy had always been a strong supporter of a banking levy. Chancellor Merkel also saw the logic of global action. Because of the amount of state banking in Germany, much of the levy would involve a transfer within the public sector, but she confirmed that Germany would move in line with an agreed proposal. And with the support of President Barroso and Prime Minister Zapatero, who was now president of the European Council, we had a shared European position. It was suggested that Europe could move ahead on its own with an all-European banking tax. But, in my view, we needed the US.
In March, I conferred privately with Larry Summers, then Obama’s director of the National Economic Council. We agreed on the shape of a tax that would be applied in an equivalent way in the main financial centres, and we even talked about the level at which it would be set. After this meeting, I phoned President Obama. I told him that Europe was ready to move in concert with America. In April, the IMF put forward the option of a levy in a form which I found easy to support – a Financial Activities Tax, to be levied on the profits and remuneration of financial institutions and paid into national budgets. It would sit alongside a Financial Stability Contribution, which all financial institutions would pay and which would be used to cover the cost of any future financial sector bailouts.