Editor’s Note: Neil K. Shenai is an Instructor of International Economics and Ph.D. Candidate at the Johns Hopkins School of Advanced International Studies (SAIS).
By Neil K. Shenai - Special to CNN
This week, leaders from the world’s top 19 economies plus the European Union meet in Cannes, France to discuss the future of the global economy. The sixth meeting of the G-20 since 2008 comes on the heels of Europe’s most recent summit to solve its sovereign debt crisis. The pressures of the world economy today underscore the need for a global cooperative policy-making body like the G-20. Americans concerned about the health of the U.S. economy should watch this week’s G-20 summit with great interest.
Last week, my colleague and I wrote about the divide between countries that borrowed their way into this crisis, like Greece and the United States, and the countries that lent to them, like Germany and China. The policymaking divide that has emerged between these two blocs highlights the fact that the world’s level of economic integration has rapidly outpaced its level of political integration.
Today, we live in a world of free flows of goods, services, and capital, yet the nation-state has all sovereign authority to determine a state’s posture in the global economy. Because there is no international sovereign body that can compel states to act according to the interests of the global collective, states must cooperate with one another to ensure that their individually-rational behavior does not undermine the broader system-wide stability upon which their collective economic growth depends.
For this reason, the G-20 is the most important global economic body today. The world needs a truly representative forum, with membership from both developing and developed economies alike, in which world leaders can convene to forge cooperative solutions to the world’s pressing economic problems. Sometimes, solving global economic crises requires getting finance ministers and central bankers in the same room, debating and ultimately compromising on system-wide solutions to problems. Markets tend to respond favorably to the concerted, coordinated action of global finance ministers and the G-20 provides a good opportunity to create this system-wide cooperation.
The ongoing European sovereign debt crisis illustrates importance of the G-20 today. The health of the U.S. economy depends on the ability of European’s leaders to stem the tide of their sovereign debt crisis. Market confidence in Europe’s banks affects the health of U.S. financial institutions. In addition, the European Union is America’s largest trading partner, so a prolonged recession in Europe could also drag the U.S. economy back into recession. All other states in the G-20 rely on the swift resolution of the European sovereign debt crisis as well.
Unfortunately, Europe has proven patently unable to solve its own problems. Last week’s euphoria over Europe’s bold financial rescue package has already been deemed too little, too late by market participants. Italian and Spanish bonds, supposedly the beneficiary of this new and improved bailout, are again falling in value, proving that the magnitude of the bailout package negotiated by Nicolas Sarkozy and Angela Merkel fell short of market participant expectations. Such is the sad truth about solving financial crises: the longer you wait to confront the problem, the greater the necessary regulatory counterbalancing needed to reestablish confidence in troubled borrowers.
So where does that leave the G-20? Both the United States and China stand in a diplomatically favorable position to step into the leadership void in Europe to restore market confidence in Portugal, Italy, Greece, and Spain. The U.S., under the aegis of the IMF and Federal Reserve, can establish bilateral currency swap agreements with the finance ministries of these troubled economies so they can refinance their own debt at face value.
In markets, the fundamentals are only half of the story. Such a bold action on behalf of the United States might change investor perceptions about the solvency of peripheral European members, thus improving the very fundamentals that were originally in question. China, meanwhile, sits on a treasure trove of some three trillion dollars of currency reserves, and could easily refinance the debt of peripheral Europe coming due in the next few years. Although Nicolas Sarkozy came under domestic political fire for approaching the Chinese to participate in Europe’s rescue fund, the Chinese might prove willing to take a chance on peripheral Europe that domestic taxpayers in France and Germany seem loath to support.
All of these potential international solutions toEurope’s sovereign debt crisis require a body to help forge the consensus necessary to enact these bold, cooperative economic arrangements. The G-20 is an ideal forum of accomplishing this. Although the domain of finance ministers and central bankers might seem esoteric and removed from the daily life of most Americans, in reality, forums like the G-20 present some of our best hopes in rejuvenating the world economy today.
The views expressed in this article are solely those of Neil Shenai.