When we look at the G20’s agenda and the responses of the new global leaders in the group, it’s clear this mechanism is working and becoming more relevant every day. Take the European crisis: As one can see, Germany is seeing more international support as capital flees from Greece, Italy and Portugal. They would like to see the IMF play an important role in supporting both the emerging and US economies. China has pledged $100 billion and Brazil has pledged $50 billion, but they would both like to see a big chunk of the $2 trillion coming from Europe. On this note, Germany is feeling the pressure and isolation and is reluctant to take any bold steps. And they have their reasons: The public is fed up with the Greek crisis and they are not willing to provide any more support to other economies. Merkel is up for election and losing support every day. If the situation continues as it is she will eventually need the support of the Social Democratic Party of Germany (SPD).
On the other hand, after seeing the European funds come into play, emerging economies are willing to support this new European firewall, under the control of the IMF, but they would like to have a say in proceedings. The World Bank presidency will soon be up for grabs and the US has a role to play in the process. Many prominent figures have appeared as possible candidates to replace World Bank President Robert Zoellick, but they are all from the US. More money is to come from emerging economies but they would also like to see their voice heard at the helm of the World Bank after not seeing any transformation at the IMF. The problem is, they are not organized and they do not have a candidate backed by all players so far. That’s why financial reform and the role of the international institutions are still up in the air and a reform agenda requires the correct steps to be made on the way. It looks like the G20 has the guts to talk about this and they have to hand all the people needed to solve these problems.
Reorienting the economies of countries with large external surpluses -- like China and Germany -- toward domestic demand and greater exchange rate flexibility remain the critical agenda items for the US, since it is suffering from an enormous deficit due to the loss of manufacturing jobs to China. There is progress, of course, but it is still very limited and gradual compared to what the US wants from China. Both countries are flexing their muscles for the upcoming year and all hopes are being pinned on the new leaders of China.
Another agenda item brought to the table by the US is the isolation of Iran. Treasury Secretary Timothy Geithner has personally worked with countries who rely on Iran’s oil to decrease this dependency and therefore isolate Iran. It’s a difficult mission to achieve, but it’s the only way to guarantee Obama’s reelection without outside interference, such as an Israeli attack on Iran. In six months we will see how successful these discussions have been. This tension has placed stress on the oil market. Iranian threats and the fear of an oil shortage have put an upward pressure on oil prices in recent weeks and G20 countries like Saudi Arabia have promised more supplies. So, as one can see, the G20 is the venue to discuss this problem, too. Iran failed to pay for Indian rice last week, which is a sign of the effects of this pressure if you believe Israeli media.
On the other hand, the US economy is getting stronger every day, showing better signs compared to last year. The recovery is still gradual but is now supported by a more balanced pattern of growth. The fiscal deficit and a huge debt portfolio are still big problems for the economy. Unemployment, still hovering at over 8 percent, has put a big burden on Obama. In his recent book, Bill Clinton emphasized the importance of putting the real estate market in order. As long as the US fails to solve its problem with homeowners who are swamped with debt by restructuring their mortgages, it is very hard to see the full recovery taking place as Clinton described. The recovery is gradual, yes, but the unemployed are still unemployed and they feel the burden. As long as unemployment in the US cannot be solved, we will not be immune to another global downturn.
As we can see, the G20 is even more relevant than ever.
