Who speaks for Europe in the G-whatever?

The G-7 (USA, Japan, Germany, UK, France, Italy, Canada) was taken off life support at the IMF – World Bank Annual Meetings. So was the G-8 (the G-7 plus Russia), although even fewer observers noticed or cared.  Since international organisations are never formally killed off, the G-7 and G-8 will simply be allowed to fade away. They reflected the economic and geopolitical distribution of power in the immediate aftermath of World War II.  When reality changes, even international organisations eventually catch on and up.  Germany, the UK, France and Italy are global bit players at best now.  They only matter if they act jointly.  The way to do this is through the EU – but with a twist.

For global economic and financial governance, the G-20 is supposed to take over from the G-7/8.  It consists of the ministers of finance and central bank governors of the G-8 plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi-Arabia, South Africa, South Korea and Turkey. The tally is completed by the European Union, represented by the rotating Council presidency and the European Central Bank President. The Managing Director of the International Monetary Fund  and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee (IMFC) and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis.

In addition, a few countries have managed to elbow their way into the G-20 meetings for specific issues where they view themselves as playing a globally significant role.  As far as I can tell they achieved this by throwing their toys out of the pram and/or threatening to hold their breath and making a scene. The Netherlands fall into this category.  They base their claim to be invited (which was effective on three occasions thus far) on the country’s generosity as development aid donors, obviously not heeding the Talmudic view that giving charity and boasting about it, is actually a sin.

The G-20 (which as noted has 24 ex-officio member states, entities or bodies, plus assorted ad-hoc charity-members) has two obviously features that limit its effectiveness. First, is is too large.  Second, it does not have a permanent staff or secretariat, so there is no institutional memory and their meetings and deliberations are invariably badly prepared and a shambles.  The lack of permanent staff can be remedied by making the IMF and the BIS responsible for administrative support.

As regards size, there is no alternative to serious pruning.  When the 19 national ministers of finance, the 19 national central bankers, the two EU representatives and the four representatives from the Bretton Woods organisations and committees are all present, there are 44 ex-officio participants, not counting Dutch or other minor league interlopers.  Fortunately it is easy to wield Occam’ razor.  After shedding the unofficial intruders, the first to go are Argentina, Australia and Canada.  South Korea also goes, until it unifies with North Korea.  Europe (excluding Russia) gets one minister of finance and one central banker.  How these are to be selected will be discussed below. This brings us down to a G-13 (not counting the 4 persons representing the Bretton Woods organisations; given the new G-20/G13 members, the chairs of the IMFC and of the Development Committee of the IMF and World Bank can also be removed as G-20/G-13 members. The new G-20/G-13 could indeed double up/treble up as IMFC and Development Committee.

Such a G-13 is still too large for serious discussions on economic and financial matters.  When urgent action is required, a subset of the G-13, the G-4, will have to take over.  This would consist of the USA, Japan, China and ‘Europe’.  If India or some other country (Brazil?) continues to grow and Japan continues to stagnate as regards GDP and to shrink as regards population, such a newcomer could replace Japan in due course.

But how would the European representatives for the G-13 and the G-4 be chosen?  I believe there is only one sensible solution.  No European nation state can fulfill that role.  The only conceivable candidate, Germany, cannot deliver a central bank head who matters, because Germany is part of the Eurosystem.  France, the UK and Italy are medium-sized European countries of no global economic significance.  Before someone objects that the UK is the sixth largest economy in the world (using GDP at market exchange rates or world trade share as the size metric) let me point out that you can be sixth largest and still be small. In fact, you could be the largest and still be small.  As the Table below, based on IMF data for 2008, makes clear, at the moment there is one large national economy, the US, and there are two medium-sized national economies, Japan and China. The rest, with the possible exception of Germany, are tiddlers, and Germany, as noted before, does not have a central bank that makes monetary policy.

Rank Country GDP (millions of USD)
World World 60,917,477[4]
European Union 18,387,785[4]
1 United States 14,441,425
2 Japan 4,910,692
3 China 4,327,448h
4 Germany 3,673,105
5 France 2,866,951
6 United Kingdom 2,680,000
7 Italy 2,313,893
8 Russia 1,676,586
9 Spain 1,601,964
10 Brazil 1,572,839
11 Canada 1,499,551
12 India 1,206,684
13 Mexico 1,088,128
14 Australia 1,013,461
15 South Korea 929,124
16 Netherlands 876,970
17 Turkey 729,983
18 Poland 527,866
19 Indonesia 511,765
20 Belgium 506,183
21 Switzerland 500,260
22 Sweden 478,961
23 Saudi Arabia 469,462
24 Norway 451,830
25 Austria 414,828
26 Taiwan 391,351i
27 Greece 357,548
28 Iran 335,233
29 Denmark 340,029
30 Argentina 324,767
31 Venezuela 319,443
32 South Africa 276,764
33 Thailand 273,313
34 Finland 271,867
35 Ireland 267,579
36 United Arab Emirates 262,150

Could the EU represent Europe in the G-13 and the G-4?  Assuming both would mainly deal with economic and financial matters, the chair of Ecofin could be the EU representative.  Unfortunately, there is not a unique EU central bank. Only 16 of the 27 EU member states are also part of the Eurosystem.  That number is likely to increase rapidly over the next few years, but not fast enough to give us a single EU central bank.  Sending more than one EU central banker to the G-13 or the G-4 would be silly.

The obvious solution is to have the Eurozone as the European G-13 and G-4 representative.  The chair of the Euro Group (the Eurozone finance ministers) and the President of the ECB would represent an area with a 2008 GDP of $13.6 trillion (according to World Bank data), only just less than that of the US (the EU is signficantly larger as regards GDP and population than the US).  The ECB can deliver monetary policy commitments that matter – effectively on a par with the Fed.  The chair of the Euro Group has no such luck in the fiscal field, unless effective prior fiscal coordination can be achieved and binding fiscal commitments made by the 16 Euro Group member states.

It is possible that making the chair of the Euro Group a member of the G-13 and G-4 would strengthen the incentives for greater fiscal coordination in the Euro Group, and might even generate greater momentum towards the next natural step on the road to further European economic and political integration – the creation of an embryonic fiscal Europe, with supranational taxation and borrowing powers, to complement the supranational spending competencies of the European Commission.  The need for a Eurozone-wide fiscal authority to back up the ECB and the Eurosystem, and to permit systematic coordinated fiscal burden sharing when systemically important cross-border financial institutions are bailed out, should have become obvious to all following the financial crisis of 2007 -2009.

But even if a fiscal Europe gets kicked into the tall grass for another decade, the situation with an impotent chair of the Euro Group representing Europe at the G-13 and the G-4 would not be worse than the current situation in which no meaningful fiscal coordination takes place at the European level or at the G-7 or G-20 levels.  The cooperative and coordinated aspect of the fiscal measures announced by the G-7 and G-20 were limited to the simultaneous announcement of a bundle of national fiscal policies put together with zero coordination and cooperation.

You may object that the Euro Group does not have any official existence in the EU Treaties and your objection would be both correct and irrelevant.  First, formal Treaties, conventions or other (quasi-legal) documents are neither necessary nor sufficient for the creation of country groupings capable of wielding influence and power. The G20 itself (like the G7, the G8, the G24 and whatever other Gs there may be) does not derive its existence from a Treaty, convention or other legal document.  It is an association of convenience that exercises its influence and whatever power it may have at the expense of international organations that are Treaty- or convention-based, like the UN, the IMF and the World Bank.  The Euro Group likewise hollows out the corresponding EU institution – Ecofin.

Second, the Eurogroup actually does get mentioned in the Treaty of Lisbon, which will become the de-facto constitution of the European Union once the Emperor of the Czech Republic gets around to putting his John Hancock on the document.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website