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Britain off the list when IMF
assembles the new world order High-level talks on global trade problems show the irrelevance of the G8 , says Heather Stewart Sunday July 2, 2006 The Observer Vladimir Putin will roll out the red carpet for his
fellow G8 leaders in St Petersburg later this month, as they gather for their
annual chin-wag; but news that the International Monetary Fund has invited a
rather different group for high-level talks on global financial imbalances is a
reminder that the G8 is no longer where the action is when it comes to the world
economy.
At the IMF's spring meeting in Washington in April, its member governments gave it new powers of 'multilateral surveillance', allowing managing director Rodrigo de Rato to assemble small groups of relevant countries to discuss in private how to deal with pressing global issues. Mervyn King, the governor of the Bank of England, welcomed the radical reform as a way of opening channels of communication between countries that had previously had little real opportunity to consult each other. The guest list for the first round of talks has now been announced. Around the table will be the US, the eurozone countries (taking up a single seat, instead of three as when Germany, Italy and France fly in for the G8), China, Saudi Arabia and Japan. This select group has been chosen not on sheer economic weight, but because its members are crucial to the vast financial and trade imbalances that the IMF believes could destabilise the global economy. The announcement has been seen as a long-overdue admission that full-scale IMF meetings, with more than a hundred finance ministers making pre-prepared speeches and blaming each other for the state of the world, were achieving very little. At the same time, the most prominent smaller-scale grouping, the G8, with all of its attendant pomp, no longer reflects contemporary reality. At the G8, the US, Russia and Japan sit alongside ministers from Canada and Britain - given life membership through historical ties - and Germany, France and Italy, now bound together in a single currency and trading bloc. China, India and other fast-growing and increasingly influential countries are sometimes invited along to ad hoc meetings - usually, in China's case, to be hectored about the need to float its currency. G8 finance ministers also often take the opportunity for a bout of megaphone diplomacy against the Opec oil producers. Back at the IMF in Washington, the representatives of a new world order are gathering, and Britain won't be there. Gordon Brown is an evangelist for globalisation, preaching to his fellow finance ministers about the advantages of an integrated world economy. But the invite-list for the IMF talks is a reminder that one unavoidable implication of the new economic order is that Britain (quite literally) loses its seat at the table. 'It's clearly the right bunch of countries,' said Stephen King, chief economist at HSBC. China, and more recently oil-producers such as Saudi Arabia, have been piling up US financial assets, helping to fund a yawning current account deficit now worth 7 per cent of GDP for the world's largest economy. In simple terms, the US is spending 7 per cent more than it is earning, much of it on cut-price Chinese consumer goods, while the Chinese are squirrelling away their earnings in dollars and Treasury bills, instead of spending them at home. Japan and Europe, meanwhile, with their ageing populations, have been expanding slowly, and piling up their own savings. Sheer economic logic means these imbalances will have to be resolved but it could happen in what the economists call an 'orderly' fashion, through a smooth depreciation in the dollar and a pick-up in growth elsewhere in the world, including in Europe and Japan; or more dramatically, through a sharp US downturn - perhaps even a recession - whose effects could be devastating. 'The preservation of growth requires the imbalances to get worse, unless the surplus countries really start to spend money,' says Charles Dumas of Lombard Street Research. 'If you take away some miracle burst of spending, you're left with only one way out, and that is to have a big slowdown in the US. I still think that's the most likely outcome.' That's what China, the US, Saudi, the eurozone and Japan have to talk about. The discussions, which could begin within weeks, will be guided by IMF chief economist Raghuram Rajan, who warned in April that, 'far too little is being done in far too many places' to resolve the imbalances. Without concerted action, including a depreciation of the dollar, there was a serious risk of a return to 1930s-style protectionism. De Rato has sketched out an ambitious goal for the new, more private talks, which will take place away from the media scrum of a G8 or an IMF meeting. 'The objective of the multilateral consultations will be to produce a common vision for action, with balanced contributions and collective benefits, to address vulnerabilities that affect individual members and the international financial system.' Dumas says it will be hard enough to persuade the participants to agree on what the problem is, let alone the solutions. 'What the US would say is, "the Chinese need to revalue their currency"; what the Chinese would say is, "if our market is going south because the US is slowing down, the last thing we need is to make ourselves less competitive at the same time".' Twenty years ago, formal financial pacts were the rich world's weapon for heading off violent movements in foreign exchange markets and restoring calm. After a fresh wave of globalisation, and a firm ideological turn away from government intervention in the markets, this approach is out of fashion. King says the most likely outcome is 'something which will seem a bit lightweight', perhaps a commitment from the US government to tidy up its finances (and hence borrow a bit less), in exchange for an agreement from China to press on with financial market liberalisation, and from Japan and Europe to make more reforms that could help them to grow faster, and pick up the slack if the US slows. Even if the initial results of the talks are not earth-shattering, having the right people around the table could become critical. Complete archives at http://www.sitbot.net/ Please let us stay on topic and be civil. OM YAHOO! GROUPS LINKS
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