Crashed
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The knock on the UN was that it was either an empty talking shop or a stage for global grandstanding. Creating an expanded council of the “big 20” with all the principals in the room promised a more businesslike approach. But would global governance à la G20 be any different? The first G20 meeting in Washington on November 15, 2008, was not encouraging. The time allowed was too short. The leaders went around the table delivering prepared statements. After the twenty participants had each had their fifteen minutes, the allotted five hours were up. The statements were of varying levels of discipline, relevance and sophistication. The Germans, Australians and Canadians were on point. Sarkozy grandstanded and demanded action on the Doha trade round, despite the fact that France’s defense of European agriculture was one of the greatest obstacles to progress on world trade liberalization. Italy’s Prime Minister Berlusconi had nothing to say about the economy, but he did at least offer warm wishes to the outgoing President Bush. For a “global” forum there were still too many Europeans around the table.27 Brazil and Argentina enjoyed their moment in the spotlight. They had axes to grind and wanted to fire off parting shots in the direction of President Bush.
Rather than any substantive discussion, the leaders gave their approval to a laundry list of ninety-five precommitments, including an agreement to a second gathering in the spring. Perhaps most important, there was strong language about the need to maintain open global trade. There would be no protectionist free-for-all, as in the 1930s. There was also an agreement to abandon a narrow view of fiscal propriety and not to discourage deficits, but no agreement on a coordinated worldwide stimulus. Why the G20 would matter, it seemed, was that it would be the channel through which the “great powers” set the agenda for change in other global institutions. In November 2008 there was an agreement between the FSF—the global assembly of bank regulators—and the IMF for the FSF to define new standards for financial regulators, for the IMF to oversee their implementation and for all financial organizations to widen their membership to include the assertive new emerging economies.
III
One reason that the first G20 could not do more was that it met ten days after the US election. After eight years of Republican control of the White House, president-elect Barack Obama was expected to set a new tone. But Obama refused to upstage the incumbent president. What Obama’s approach to international economic affairs would be when he took office was unclear. This left it up to others to project their fantasies onto the next American administration. Gordon Brown had lobbied hard to get the right to host the second G20 in London. As the slogans of Tony Blair’s “New Labour” had faded, Brown and his staff were desperate to associate themselves with the charisma of the new president and his promise of hope.28 But Brown had visions that went beyond that. In the summer of 1933 London had hosted a World Economic Conference. Called to heal the wounds of the Great Depression, it had been blown apart by posturing from Nazi Germany, divisions between Britain and France and the isolationist turn of the early Roosevelt New Deal. London in 1933 had symbolized the descent into disintegration and economic nationalism that blighted the decade that followed. Brown was determined to avoid that fate. Instead, London did its best to sell the 2009 G20 as a new Bretton Woods.29 With an eye to the history books, Brown and his staff consulted with experts on FDR and the New Deal. Biographies of John Maynard Keynes were on Downing Street bedside tables. What London needed to make real this historical romance was for the rest of the G20 to play along. And the signs were not good.
The new team in the White House did not welcome the solicitations lavished on them by the British. They had no patience for talk of a “special relationship.” The Obama administration was focused on the Pacific, not on Europe. The first foreign visitor received at the White House was the Japanese prime minister, Tarō Asō. But overriding everything was the need to focus on domestic policy. Obama might not even have made time to attend the G20 meeting, but for the fact that his aides had written in his diary that he had to be in Strasbourg on April 4 to mark the sixtieth anniversary of the founding of NATO. Brown’s team scheduled the London G20 for two days earlier to fit around the president’s travel plans.30 To prepare the ground, on March 3, 2009, Gordon Brown arrived in DC for meetings with Obama and a triumphant speech to both houses of Congress. He spoke in bathetic terms of a “grand bargain” being struck in London and the sealing of “a global new deal.”31 What he had in mind was a “trillion-dollar summit,” a giant orchestrated stimulus to lift the world economy out of recession. Unfortunately for the Labour Party’s control-obsessed PR machine, the rest of the world was not cooperating. On March 14, 2009, as the G20 finance ministers assembled in London for a presummit meeting, Chancellor Angela Merkel dropped in for a visit. The result, to the embarrassment of Gordon Brown, was a concerted pushback orchestrated between Merkel and Christine Lagarde. Not only did Germany and France think that stimulus on the scale being rumored was unwarranted, but they suspected it was being used to push more sensitive issues off the global agenda. “The French and Germans worried that the villain of the piece—Anglo-Saxon market behaviour—was being let off the hook because the focus was now on the world economy.”32 America would want to talk about other people’s trade surpluses and not its dangerous banks.
Even more disconcerting was the reaction from China. By the spring of 2009, Beijing was growing impatient with the lack of discipline in the West. In Beijing’s view, it was reckless American deficits that had driven the global imbalances. Now, instead of retrenching, Britain and America were talking about even more spending. With a week to go to the G20, on March 23 the Chinese central bank chairman, Zhou Xiaochuan, surprised the world by launching his own call for a new Bretton Woods.33 The Chinese had been at the original meeting in 1944 and they knew their economic history.34 As far as Zhou was concerned, it was time to revisit the fundamental decisions made in 1944. It was thanks to America’s overweening power at the end of World War II that the dollar had been established as the global reserve currency. Ever since, America had been free to spend at will while accumulating huge deficits. To ensure true stability, as John Maynard Keynes had argued for the British delegation in 1944, the world needed a global monetary unit independent of any national currency. The obvious candidate, Zhou suggested, was the IMF’s unit of accounting and credit, the Special Drawing Rights (SDR). With this in place there would be a true anchor of stability that was not at the mercy of a single superpower. On that basis one could then talk about rules binding on both deficit and surplus nations, the United States as well as China.
One might wonder why the Chinese regime would wish to change a system from which it had benefited so spectacularly. After all, it was Beijing that had pegged its currency against the dollar since the 1990s, creating what some economists had already dubbed “Bretton Woods 2.”35 The conventional reading in Washington was that China was free riding at America’s expense. But that would be to view the situation with Western eyes. China had fixed its exchange rate in 1994 as a defensive measure at a time when the United States was running a responsible fiscal policy. If since 2000 gigantic imbalances had begun to appear, that, in Beijing’s view, had more to do with America’s fiscal recklessness than with China’s currency manipulation. China’s export surplus was far from being an unmitigated blessing. As far as Beijing was concerned, the surplus reinforced China’s excessively investment-driven growth path and led it deeper into a lopsided entanglement with the United States. A more balanced trade account was a natural concomitant of the effort to shift the focus of economic growth toward domestic consumption.36 In the meantime, the PBoC’s currency proposal was a shot across the bows of the new administration and a sign that Beijing was running out of patience with America.
China’s assertive proposal attracted more attention than Gordon Brown’s wistful reminders of the 1940s, and rightly so. Not since the days of Mao had China made such a bold proposal on a fundamental issue of global governance. And the Chinese pr
oposal chimed with statements made by both France and Russia, who were also questioning the dollar standard. It also aligned with plans that were being developed at the UN and spearheaded by the Nobel Prize–winning economist Joseph Stiglitz that advanced the idea of an SDR-based global currency.37 Washington was taken aback. When pressed by journalists, President Obama remarked that he didn’t think the world needed a global currency.38 His new Treasury secretary, Tim Geithner, was less circumspect. Seeking to placate the Chinese, Geithner casually remarked that he was “quite open” to the idea of an “evolution” toward a greater use of SDRs as a global reserve asset.39 The currency markets were shocked. The dollar lost 1.3 cents against the euro. It was red meat for the Republican right wing and Fox News commentators, who scandalized their audience by claiming that the Obama administration was scheming to replace the greenback with a global currency.40 Geithner learned a hard lesson in PR. Rowing back urgently, he took to the TV networks to affirm that, in fact, he agreed with his boss. A strong dollar should remain as the anchor of the world economy.
Perhaps not surprisingly, China’s vision of a Bretton Woods 2 did not make it onto Gordon Brown’s G20 agenda. Nor, however, would the reality of the situation since the autumn of 2008 be up for discussion. Far from weakening the dollar’s grip on global finance, the crisis had in fact strengthened it.41 In currency markets the demand for US Treasurys as a safe-haven investment had driven the dollar upward. The Fed, through the swap line system, was backstopping the liquidity of the entire global banking system. If the London G20 was truly to have been a second Bretton Woods, the dollar-based banking system, the swap lines and the Fed’s new role as global liquidity provider would have been at the center of the discussion. That would certainly have wrong-footed the Europeans, whose banks were among the chief beneficiaries. But no one had any interest in publicizing those fragile arrangements. It was better to leave the broader issues of global currency architecture off the agenda altogether.
IV
It was a delicate balancing act. Washington knew that it wanted cooperation, but it had no interest in trumpeting the central role played by the Fed and the US Treasury since the previous year. The British wanted to bandwagon their own underpowered version of a G2, a reheated special relationship, on the new president. But that was painfully out of touch with reality. On the morning of April 1, 2009, after Brown and Obama had breakfasted together in Downing Street, the president spoke to the press. Complimenting Brown on his diplomacy in bringing the meeting together, Obama remarked: “Well, if there’s just Roosevelt and Churchill sitting in a room with a brandy, that’s a—that’s an easier negotiation. . . . But that’s not the world we live in, and it shouldn’t be the world that we live in.”42 Across London that very morning, Merkel and Sarkozy were underlining the point. They had arrived early in London to stage their own breakfast meeting and joint announcement. In Sarkozy’s words, “France and Germany will speak with a single voice.”43 What was needed was not fiscal stimulus but a real crackdown on global financial markets. Sarkozy threatened to walk out unless the conference seriously addressed the issue of tax havens. “This has nothing to do with ego, this has nothing to do with temper tantrums,” he claimed, preempting the spin that the British were bound to put on any French criticism. “This has to do with whether we’re going to be up to the challenges ahead or not.” Merkel, characteristically, delivered a morality lesson: “The tendency is not to deal with the roots of the evil. We need to learn something from this crisis.”44
As the G20 leaders assembled that afternoon in Buckingham Palace, it was a freak show of outsized personalities. When he was not grandstanding, Sarkozy was ostentatiously busy on his cell phone. Argentina’s Cristina Fernández de Kirchner reprised her anticapitalist posturing from Washington. Italy’s Silvio Berlusconi was noisily desperate to attract Obama’s attention. Otherwise, he was prone to nodding off. Merkel was unflappable and hard to budge. The Chinese dug in hard on their negotiating position. Several heads of government were unable to communicate fluently in English and most had little technical command of the material. Over the entire assembly glowered Gordon Brown, sleep deprived and running on a manic high from which he would soon suffer a shattering rebound. As chair in closed session, Brown delivered what was, by all accounts, a domineering, high-energy performance that struck several witnesses as bordering on the inappropriate. Brown was lucky to have Obama as his gracious and engaged second. At several points the negotiations threatened to break down. But though the sausage making was unsightly and at times bizarre, by the end of the main conference day on April 2, the second G20 had produced results.
The communiqué would begin and end with general statements about the scale of the crisis and commitments to work cooperatively to avoid protectionism and to bear in mind the interests of the wider population, the least developed countries, etc. This was the boilerplate. The real politics of the communiqué began in earnest with the section on financial reform. There would be a new global Financial Stability Board, which would devise improved regulations and discipline the ineffectual private credit-rating agencies. The G20 thus confirmed its role as the de facto lead body, setting the agenda for the Basel Committee, the IMF and other agencies of global governance. As the Germans and the French were determined to block talk of coordinated fiscal stimulus and there was something akin to a conspiracy of silence around the role that the Fed was playing in providing global liquidity, it was by way of the IMF that Brown and Obama would deliver their expansive impulse. The IMF’s ambitious director, Dominique Strauss-Kahn, was more than happy for the Fund to play a lead role. But given the loan portfolio it had taken on since the previous autumn and the scale of its commitments in Eastern Europe, the fund urgently needed to replenish its resources. An internal memo drafted in January 2009 suggested that in a worst-case scenario, with the IMF increasing its client list from two to sixteen it would need at least $300 billion in new resources.45 Treasury Secretary Geithner, true to his “overwhelming force” doctrine, was pushing for a far larger figure than that. The sticking point was that Asian and Latin American agreement to any expansion of IMF resources depended on a redistribution of voting rights. By April 2008, as a result of two rounds of reform, voting rights within the IMF had already been shifted by 5.4 percent, with Korea, Singapore, Turkey and China seeing the biggest increases. But this still left China with only 3.81 percent of the votes and India with 2.34 percent. In London there was an agreement to a further 5 percent shift, largely at the expense of the Europeans. This bought enough support for a truly headline-grabbing increase in IMF resources. The IMF would receive $250 billion in immediate new financing from members. There would be up to $500 billion in new Arrangements to Borrow, which provided the IMF with credits from member states on demand. And finally there would be an issue of $250 billion in SDRs to all the IMF members.46 This gave Brown the “plump, round headline figure of $1 trillion” that he so craved.47 It wasn’t a conventional Keynesian stimulus, but it represented the conclusion of the lessons learned since the major cycle of international crises that began in 1994 in Mexico. The IMF was equipped with the firepower necessary to deal with the fallout from a transnational, twenty-first-century banking crisis.
But the G20 was not yet home and dry. The sticking point on the final afternoon was tax havens. Both Sarkozy and Merkel insisted that there must be action to curb the paradis fiscaux. Obama had campaigned on the same issue. Gordon Brown, sensitive to the interests of the City of London, was less keen. But it was the Chinese who were most adamant. Macao and Hong Kong functioned as conduits for flight capital from mainland China. But for Beijing to close that door would cause major ructions within the Chinese oligarchy. Furthermore, given its championing of anti-imperialist nationalism, China was not going to allow former colonial possessions to be placed under a new regime of international supervision dominated by Westerners. Sovereignty was a nonnegotiable issue. With only minutes to go before the heads of government dispersed,
Brown’s G20 threatened to derail over the clash between the French and the Chinese. Brown himself was fully taken up with his chairing duties and could not break away to broker a side deal. It wasn’t likely that either France or China would be browbeaten by Downing Street underlings, even of the shouty variety. So it was Obama who swung into action, coaxing the two sides to accept a face-saving compromise under which the G20 would “take note” of a blacklist of tax havens issued by the Organisation for Economic Co-operation and Development (OECD), an organization descended from the Marshall Plan era to which China did not belong and which it could feel free to ignore.
Satisfied with the deal, Sarkozy promptly tried to reclaim the agenda he had launched at the UN the previous September. Ahead of his host, he bounded out of the final session to be first before the cameras. At least for a few moments, the French president posed as the front man of a unified G20. Warming up his Gaullist act, he announced that a “page had been turned” on the history of “Anglo-Saxon capitalism.” The age of deregulation was over. It was a token of Brown’s success that Sarkozy was so keen to steal his limelight. Disagreement and breakdown had been avoided. Speaking to a global TV audience that he optimistically reckoned at 1 billion, an exhausted Brown delivered the news that the world’s leading powers had pulled together. They had agreed to act in a concerted fashion. Obama was happy to declare that “[b]y any measure, the London summit was historic.”48 The decisions they had taken were “bolder than any other response to a crisis in living memory . . . whether they are sufficient, we’ve got to wait and see.” Angela Merkel was more grudging. It was, she admitted, a “very, very good, almost historic compromise. This time the world does not react as in the thirties. This is a victory for global co-operation.”49