Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.
Finance Ministers from G7 countries (US, UK, Germany, Japan, Italy, France and Germany) met in London on 10-11 May 2013. This was described as a rarity, because in recent years G7 ministers have usually met on the sidelines of a G20 or IMF meeting. Is the G7 reasserting itself on international economic issues? What does this mean for the G20, which was declared by leaders in 2009 as the premier forum for international economic cooperation?
G7 meeting in Bonn, 1978. From L to R in foreground: Takeo Fukuda, Jimmy Carter, James Callaghan, Pierre Trudeau, Giulio Andreotti, Valery Giscard d'Estaing, Helmut Schmidt.
The narrative around the rise of the G20 is that the changing structure of the global economy, particularly the rapid growth of emerging markets such as China, Brazil and India, is such that global economic issues can no longer be addressed by a small group of advanced economies. In 1980, G7 countries contributed 56% of global output. In 2012 it was 38%. Over the same period, the contribution from emerging markets and developing countries rose from 31% to just over 50%. The strength of the G20 is that it represents over 85% of global output.
Notwithstanding this change in the global economic landscape, and the UK saying it is still committed to the G20, the British press referred to the G7 meeting as a 'two-day summit on the global economy'.
Does the re-introduction of stand-alone finance ministers' meetings mean the G7 is back? Or is it a relic of the past, and does the meeting reflect the difficulty some advanced economies are having in giving up the reins of global economic leadership? There is probably an element of this. The meeting could have taken place on the sidelines of the IMF meetings held in Washington in mid-April. But Chancellor Osborne no doubt enjoyed chairing a meeting of his peers at a stately UK country house. [fold]
But the G7 can no longer exert the same level of influence over the global economy that it did a decade ago. There was a time when the G7 was effectively the steering committee of the IMF, with regular conference calls of senior G7 finance officials deciding which countries would receive IMF loans and on what conditions. Those days have long gone.
A traditional area of policy coordination by the G7 was the management of exchange rates. For example, in 1985 there was the famous 'Plaza Accord', where coordinated intervention by advanced economies engineered a depreciation of the US dollar. March 2011 was the most recent occasion of coordinated exchange rate intervention by G7 countries. It was designed to weaken the Japanese yen, which unexpectedly been appreciating notwithstanding the expectation that a devastating earthquake would damage the economy. The intervention had a short-term impact in lowering the yen.
The situation was very different in February 2013, with concern over 'currency wars' in the wake of Japan's aggressive monetary expansion. G7 finance ministers issued a statement that was meant to signal that countries would not target a lower exchange rate in order to gain a competitive advantage. However, mixed signals were sent when some G7 officials said the statement was targeted at Japan while others said it was not. For a group that was meant to have a record of successfully managing exchange rate movements, mixed signals caused market confusion. A clearer message on avoiding currency wars came from the meeting of G20 finance ministers on 17 February 2013. In the current environment, it is difficult to see the circumstances in which the G7 will again engage in coordinated exchange rate intervention.
One positive aspect of the recent meeting is that it was described as an informal gathering with no communiqué. As I noted in my post about writing better communiques, if there is nothing to say, don't say anything.
A continuing informal dialogue between G7 finance ministers can be useful. The focus should be on domestic policies, and there is much to discuss. For example, the US had signaled it would tell Germany to do more to revive growth. It would have been valuable if the US and Europe also discussed the need for greater consistency in implementing banking reforms. Chancellor Osborne said G7 ministers agreed to target tax evasion and called on the OECD to examine possible changes to transfer pricing rules. But this cannot be advanced by the G7 alone. G20 ministers have already called on the OECD to prepare an action plan by July 2013 to combat profit shifting to avoid tax.
The G7 is only a sub-set of the global economy. Informal meetings can be useful, but the G7 alone cannot deal with global economic issues. The continuation of G7 finance ministers' meetings is not a threat to the G20.
Image courtesy of Wikipedia Commons.