October 31st, 2011
02:44 PM ET

Why the G-20 matters

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.

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Topics: Economy • Global • Multilateral institutions

soundoff (15 Responses)
  1. j. von hettlingen

    this site is defect!

    November 1, 2011 at 10:40 am | Reply
  2. somesay

    IT's important because they are going to make your life a living hell.

    November 1, 2011 at 11:16 am | Reply
  3. any

    Currency swap?

    November 1, 2011 at 11:53 am | Reply
  4. Well

    50-years of BS politics and economics have gotten us to this exact point...

    But we will once again "buy" our way out of it...we ain't seen nothing yet.

    November 1, 2011 at 12:02 pm | Reply
  5. RichardP

    Because it's always more economical and energy efficient to make a light bulb and ship it halfway around the planet to its market. Isn't it? Geez these guys want us to believe it.

    November 1, 2011 at 12:11 pm | Reply
  6. Nick

    Calling a helping hand from China makes you and your article look like a fool. Even some of EU members are reluctant to rescue Greece because of sovereignty.This is only the beginning; more porblems are coming from EU nembers. Nicolas Sarcozy said it was a mistake to allow Creece to EU zone. These eastern European nations think themselves that this is special privileges to be EU members, but they have make changes... a real change.

    November 1, 2011 at 12:50 pm | Reply
  7. Bill B

    A one-sided arguement is presented. We should bail out Europe? We're heading in the same direction. Nation-States act in their own best interest and nothing is going to change. That is one of the reasons that China is keeping their currency rate below ours artificially, because it is state controlled and our currency is market based. I have an idea, let China bail them out and we stay out of it.

    November 1, 2011 at 12:56 pm | Reply
  8. Manie

    Greece the proverbial ticking time bomb? there shall be no escape from this monstrosity of debt. economic judgment day is coming and coming fast. socialism was a bad expirament, facisim, was deadly, and now we are begining to see capitalism rear its nasty behind, and it will top all the other forms of economic policies. So the question is what works? I believe by the time the world tries to answer this question it may be a little too late, because currency wars will eventually lead to real wars and God fobids we have a 3rd world war , who know what the aftermath will be. we live in a world with finite resources, and all these hard headed politicians cant get it through thier thick skull.

    November 1, 2011 at 1:29 pm | Reply
  9. TP

    NWO

    November 1, 2011 at 5:00 pm | Reply
  10. j. von hettlingen

    The G 20 evolved from the G 7, an exclusive club which has lost its prestige, as the emerging economies surpass its club members. Very soon many more will join as well, which is good.

    November 1, 2011 at 6:20 pm | Reply
  11. Goodguy1

    Basically the people meet and discuss how to hold the whole thing together. They discuss the affluent people with influence, then they discuss how to keep the working stiffs happy enough so they don't rebel and the whole system goes down to the toilet. Other items discussed with little fair and no resolve: the environment, resources, fish stocks, clean air yada yada yada.

    November 1, 2011 at 6:43 pm | Reply
  12. Manie

    its amazing how the Human race has managed to survive this long. It has always been about the money and will always be.

    November 2, 2011 at 8:17 am | Reply
  13. Bill marshall

    I just watched the news clip on the G20 and CNN had Cannes located on the Normandy coast of France which is absolutely incorrect. Please get right. Cannes is on the Mediteranean Coast near Nice. I expect better from the world's best news network.

    November 2, 2011 at 5:07 pm | Reply
  14. Saif

    aedergiwatbr101 on July 30, 2010 Thank you for sharing this video !!! It gives a lot of learning thanks Please take a look on my videos !!!

    February 12, 2012 at 2:25 am | Reply

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