In April 2009 the top 22 economies of the world will meet together to discuss the financial crisis. But the real busywork of the event has already been happening beforehand. Countries have been speaking together, Presidents have been pushing deals, and bankers have been saying ambiguous phrases.
Leaders from France, Germany, Italy, Spain, the Netherlands and the United Kingdom met in Berlin on Feb. 22 to forge a unified European stance on the global economic crisis ahead of the G-20 summit. The European leaders came out of the meeting with agreements on two aims: to push for global regulation of “hedge funds and other private pools of capital which may pose a systemic risk,” according to the official statement, and to recapitalize the International Monetary Fund (IMF) to the tune of US$250 billion, essentially doubling the body's funding. British Prime Minister Gordon Brown called the IMF recapitalization the “global New Deal.”
The European G-20 members' two broad goals will find different levels of success at the April 2 summit. The proposal to create global regulation for hedge funds inevitably will have to be approved by the United States - a possibility with the new U.S. administration. The idea to recapitalize the IMF, however, will find very few opponents.
The exposure of several European banks to the volatile region known as “emerging Europe” (Central Europe, the Balkans and the Baltic states) threatens to cause further bank crashes in the Continent, particularly in Austria, Belgium, Italy and Sweden, whose banks are highly exposed. And the grave economic crisis threatens to magnify social unrest and political instability across Central Europe and the Balkans - as was the case with Latvia on Feb. 20. This is the type of situation the EU members of the G-20 are looking to preempt with additional funding for the IMF.
The proposed IMF funding boost is an arrangement particularly appealing to Berlin. Germany was resistant to lobbying efforts by Austria and other exposed countries for a bailout, because it felt that the bill for any Europe-wide effort to rescue emerging Europe would fall in Berlin's lap, despite the relatively limited exposure of German banks to the region. But Germany will gladly contribute to a bailout that is coordinated - and most importantly, contributed to - on a global level.
Mobilizing the IMF to coordinate the rescue effort is a plan that will find general agreement. First, the IMF is an experienced international body that, through its own pitfalls and successes, has sufficient institutional memory to deal with a regional rescue.Second, the IMF is the only international body with the organizational capacity to undertake the rescue of an entire region. A regional organization with particular expertise in Central and Eastern Europe - for example, the European Bank for Reconstruction and Development (EBRD) - might be just as proficient and have as much in-region experience to resolve the crisis. The EBRD is a particularly interesting avenue for the economic rescue of Central Europe because it can actually give money directly to select banks (and has been quietly doing so since the crisis began). However, the EBRD commands only 20 billion euro (US$25.5 billion), of which only 5 billion is on hand at any one time. According to the World Bank, Central Europe, the Balkans and the Baltic States need at least 120 billion euro (US$154 billion) for bank recapitalization, a level of funding that only the IMF can hope to offer.
But the rescue actions the IMF has undertaken thus far have strained its purse. The IMF received a $100 billion injection into the fund from Japan in mid- November 2008 and an extra $50 billion from supplementary borrowing arrangements, such as General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB). But the fund's one-year forward commitment capacity stood at $141 billion as of Feb. 19, compared to $202 billion at the end of 2007. The funds the European G-20 members are proposing to add would constitute a massive boost to the IMF's capacity to rescue emerging Europe.
President Lee Myung-bak has spent a lot of time preparing for the G20 summit as well. He has been meeting with Australia, Indonesia, and other countries to discourage the use of protectionist trade policies in the face of the economic crisis. These policies would be very bad for Korea, because the country depends on exports to fuel its economy.
Lee's talks with Indonesian President Susilo Bambang Yudhoyono on March 6 focused on the global financial crisis, cooperation in oil and forestry development and South Korea's ties with the Association of Southeast Asian Nations, officials said. The two leaders also had preliminary discussions for the April G20 meeting in London, concentrating on the need for measures to limit protectionism in international trade. Indonesia's trade with South Korea has been growing at about 20 per cent a year for the past five years, officials said. It is the second largest Liquefied Natural Gas supplier to South Korea, which is the seventh biggest country destination for Indonesian non-oil and gas exports.
President Lee, in a meeting with Australia, also said his country will support Australia in opposing protectionism as a way of tackling the global economic crisis. He spoke at a Sydney lunch to open a green energy forum involving Australian and Korean business leaders. Through a translator, Mr. Lee said Australia and Korea would cooperate closely in the G20 committee on reform of the International Monetary Fund.
Unfortunately, too many countries are already engaging in protectionist practices. Ecuador, for instance, has raised tariffs on over 600 items, but most are taking more creative steps that fall into the grey area of what is considered legal under international trade law. Argentina, for example, has put new licensing requirements on car parts, textiles, televisions, toys, shoes and leather goods that create a new layer of bureaucracy for overseas exporters. The European Union announced new export subsidies on butter, cheese and milk powder. China and India have increased the tax rebates for domestic exporters, which has been seen by critics as providing a stealth subsidy that makes their products unfairly cheaper abroad.