The new world order is a messy one.
After several months of pointed debate, the Group of 20 economic powers finally agreed Friday to get behind International Monetary Fund managing director Christine Lagarde’s push for a financial boost of more than $400-billion (U.S.) to build a buffer against the European debt crisis.
Ms. Lagarde said she had combined commitments of some $430-billion, although some countries, including China and Russia, were withholding how much they would give. “Collaboration and co-operation at the international level is working well,” said Agustin Carstens, Governor of Mexico’s central bank.
The conclusion – or near-conclusion – of the debate over IMF resources says a lot about how the rise of the emerging markets has changed global economic governance.
Ms. Lagarde raised the money she said she needed without any help from the United States, the world’s biggest economy and the IMF’s largest shareholder. (Canada, too, fought the effort to the end.)
When the smaller Group of Seven claimed to guide the global economy, little of substance happened unless the White House was on board. That clearly is no longer the case. While it would be folly to suggest the U.S. no longer matters, Washington appears to have lost its veto over global economic affairs.
Most will cheer this shift. But it means the end to the predictability that made pre-G20 summitry so boring. The end of the G7 hegemony means countries, and even individuals, have multiple avenues to try to achieve their specific goals. Here’s some of the back story to the decision to boost the IMF’s firepower.
Finance Minister Jim Flaherty said in Washington Thursday that Canada intended in the future to compare itself with the bigger economies of Asia and Latin America, rather than the “old European economies.” Mr. Flaherty’s vocal opposition to additional IMF funding aligned with similar resistance in the U.S. and Britain. But as the U.S. rhetoric softened, and Britain put up $15-billion, Mr. Flaherty revealed another dimension to his decision. He said he had serious issues with the IMF’s decision-making structure, which disproportionately favours European countries. The bigger economies in Asia and Latin America that also want the IMF’s governance changed no doubt took note.
“Experience teaches us that these shocks can come, they come quite quickly, the timing cannot be anticipated in any logical way and the responses have to be dramatic and overwhelming,” Mr. Flaherty said. “We are not seeing that kind of response yet, quite frankly, in Europe, although some progress has been made."
Japan has the biggest debt in the G20. Yet after the euro zone, it was the first big economy to put money on the table, pledging $60-billion (U.S.) earlier this week. The country is a long-time supporter of multilateralism and takes pride in its position as one of the biggest donors. But Japan also is in a struggle for economic supremacy in Asia with China, which has overtaken Japan as the world’s second-biggest economy. Japan’s getting out ahead of its rival was point of pride. Japan also has a massive stockpile of reserves, including hundreds of billions in low-yielding U.S. Treasuries. Depending on the terms, Japan could end up making money on its IMF contribution.
“I’ve told the IMF that we will not only provide it with money but also make human contributions to the fund so we want it to give us posts matching the levels of our contributions,” Japanese Finance Minister Jun Azumi said.
International Monetary Fund managing director Christine Lagarde announced commitments of “over $430-billion.” However, statement commitments add up to only about $360-billion. That’s because a group of countries, including Brazil, Russia, India, and China, made pledges without saying publicly how much they intended to give. The official reason is that ministers had to go home to sort out details with their leaders. Maybe. These upstart economic giants also are playing hardball with the established powers. The BRIC countries want influence at the IMF that matches their growing share of the global economy. The U.S. and Europe have promised to do so, but are dragging feet at changing a governance structure tilted heavily in their favour. The cheques from the BRIC countries will come with strings attached.
“The BRICs unanimously agreed to support the IMF, but we are not unveiling the amounts that we will make available,” Brazilian Finance Minister Guido Mantega said. “We conditioned the money to the completion of the IMF's quota reform so that emerging countries have larger representation.”
The U.S. is hardly a diminished force: It had little trouble lining up support for its nominee to lead the World Bank, despite loud grumbles that Jim Yong Kim was the weaker of two candidates. Many observers said its opposition to Ms. Lagarde’s push for resources was based on fear of approaching Congress for the funds during an election year. It must also be said that the Federal Reserve’s willingness to lend the European Central Bank unlimited dollars has done much to ease strains in financial markets. Still, with the exception of Canada, all of America’s allies and trading partners abandoned it at the end. Notably, Treasury Secretary Timothy Geithner’s opposition softened on the eve of the G20 meeting.
“The Federal Reserve, as it did in ‘08 and ‘09, has given the Europeans unlimited access to dollar swap lines, at a critical moment,” Mr. Geithner said. “That’s something only we could do.”
Notable among the countries that opted to contribute to the IMF fund-raising effort are a group of non-G20 economies that see the new global order as an opportunity to at last wield at least a little influence. Take Poland. The country’s economy is doing remarkably well, yet a meltdown in the euro zone would be calamitous. The head of the country’s central bank, Marek Belka, expressed dismay this week with how the debt crisis has been handled, describing for an audience in Washington the difficulty countries as diverse as Germany and Spain have in agreeing on anything. But he also told his audience that North America fails to grasp the emotional attachment Europeans have for their union. Poland chipped in $8-billion, a vote that its neighbours in the euro zone will get their acts together. The euro zone might also feel it now owes Poland a favour.
“We have to brace ourselves for a protracted period of slow growth,” Mr. Belka said. “We have this grey fog coming from the West.”