I'm in Shanghai to discuss how the G-20 has been doing as the world's "premier economic forum." As fate would have it, the G-20 actually opened its collective mouth in response to the market convulsions of this week:

The Group of 20 leading economies pledged a “strong and co-ordinated” effort to stabilise the global economy in an attempt to calm tumbling equities markets spooked by fears of recession in the eurozone and a gloomy economic outlook in the US.

Bowing to pressure from investors to take action, finance ministers from the G20 economies said in a communiqué issued late on Thursday that they would stop the European debt crisis from deluging banks and financial markets, and take the necessary steps to bolster the eurozone’s rescue fund and assist banks to boost capital reserves in line with new global regulations. The statement followed a day in which the equity markets suffered some of the biggest falls since the collapse of Lehman Brothers in 2008, as investors rushed to safety in a widespread sell-off.

“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the group said in a statement. “We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines.”

The G-20's near-total muteness in the face of European sovereign debt convulsions had begun to raise some eyebrows -- particularly as it was the G-7 economies rather than the G-20 that pledged to provide dollar liquidity to European financial institutions.

Unfortunately, if you read the actual communique, you discover... well.... let's describe the statement as very optimistic about what the G-20 countries have done to promote both growth and fiscal rectitude.

One of the takeaways from my conversations so far in Shanghai has been a sense of disappointment about what the next G-20 summit in Cannes will accomplish. The Financial Times' Chris Giles provides some background on the demise of the France's grand ambitious for that summit:

In mid-February, G20 finance ministers gathered in Paris for what turned out to be a harbinger of the challenges that have beset the French G20 presidency ever since. The meeting was supposed to be routine, with finance ministers agreeing a set of indicators that might be used to assess whether their economies and policies fostered balanced global economic growth.

Far from France undermining the meeting with excessive ambitions, countries struggled to agree even the most basic steps to a more stable world economy.

A country’s current account surplus or deficit is the accepted measure of balance in its relations with other countries, but the Chinese arrived in Paris in intransigent mood. Their negotiators refused to let the G20 use the current account as an indicator of balance. After an all-night session, the absurd compromise China accepted was that countries were allowed to assess every component part of a country’s current account, but the term “current account” was banned.

That ended the French presidency’s lofty plans. From then on, limited goals became the order of the day, a shift that has been reinforced as the year has progressed.

I'd quibble a bit with Giles -- any meeting that details indicative guidelines on macroeconomic imbalances is not gonna be a routine meeting. [Um...could you translate that last sentence out of bureaucratese, please?--ed.] Sorry, to rephrase -- any meeting in which the G-20 points out that China's trade surplus is part of the problem in the global economy is not going to be a smooth meeting.

My post last week on the dubious legitimacy/effectiveness of the G-20 has prompted a few responses.  Let's take them in order, shall we? 

Colin Bradford responds by arguing that I'm judging the G-20 strictly by its summitry, which is unfair:

The G-20 is not just a summit meeting of leaders. The G-20 has a very active track, which has been in existence since the Asian financial crisis in the late 1990s, of at least biannual meetings of finance ministers and central bank presidents. In addition, G-20 deputies and G-20 sherpas often meet to advance the agenda for the leaders. More than that, as a result of the activities in the finance ministers/central bank presidents track, there is now a network of senior officials continuously active not only in preparation for G-20 meetings, but also in dealing with crises and unexpected challenges.

What this means is that the new, more inclusive configuration of major economies from every region of the world that constitutes the G-20 is a process -- communicating, consulting, and even, on good days, coordinating among 20 countries, not eight. The G-20, in other words, is not an event.

Lest this sound too pie-in-the-sky, it should be pointed out that even former Bush administration sherapas are echoing Bradford's point. 

As someone who worked on both G-20 and G-7 policy coordinaion while at the Treasury, I've experienced Bradford's point about the value of process first-hand.  The thing is, the value-added of said process does require the occasional concrete outcome -- and the last 18 months have been underwhelming on that score.  Bradford makes a valid point in observing that the kinds of policy coordination under debate in the G-20 are much more intrusive than anything that was talked about in the old G-7.  Still, at some point you want to see some outcomes, and based on what happened over the weekend, I'm fairly confident in my pessimism. 

CIGI's The Munk School of Global Affairs' Alan Alexandroff thinks I'm being too pessimistic because I'm relying on the international press coverage:

I and others have pointed out... the persistently negative international financial press – read this as the WSJ, the NYT and the FT at least. Differences are always played up; and agreements are generally characterized as inadequate.  And it is here that Dan and I differ.  

Fair enough, but I will say that my astringent evaluation of the G-20's recent activities are not only informed by press coverage, but also by off-the-record conversations I've had with both developed and developing-country participants in the G-20 process.  [Oh!!  Snap! Boom!!--ed.  Yeah, that's right, I'm going all insider-y sources on you!]  I'll be happy to hear feedback from those sherpas who think the process is working better than my "dead forum walking" characterization. 

Art Stein argues that these blog exchanges are missing the key point:

The core issue, then, is whether for the G8 or the G20 disagreement and divergence over policy options are preferable to agreement, coordination, and a concerted response.  There is a small literature among economists about whether macroeconomic policy coordination makes things better or worse.  Implicit in Bradford’s argument is that disagreement and its policy consequences are not so bad and, implicitly, to be preferred to agreement between a less diverse set of actors.  Perhaps.  But what is the evidence?  Is that true for every policy?

This is an excellent point, and one I made in All Politics Is Global -- sometimes noncooperation is actually the most efficient outcome.  On macroeconomic policy coordination in particular, sometimes successful cooperation has brought about underwhelming policy consequences (see:  Maastricht criteria). 

That said, one could argue that part of the reason for the Great Recession was the absence of any serious effort to rein in mcroeconomic imbalances five years ago.  Furthermore, Bretton Woods II is still persisting in the global economy.  So, yes, I do think coordination in this case would be a good thing, and for a variety of excellebnt domesticf political reasons in the United States, China and Europe, it ain't happening. 

Am I missing anything?

Your humble blogger has been off the grid the past few days because he was north of the Guatemalan border south of the Rio Grande the past few days as a (very happy) guest of the Mexican Foreign Ministry's Matias Romero Institute.  I was there to talk about economic powers and the G-20. 

A few random world politics and travel notes:

1)  Let me add Mexico to the list of Civilized Countries Not Stupid Enough to Force Travelers to Remove Footwear Going Through Security.  Hear that, TSA???!!!!  This list is getting really friggin' long, and I don't see the United States anywhere on it!!!! 

Sorry, I had to get that out of my system.

2)  I'm a reasonably well-read guy, and tend to hang around with people who claim to be up on world politics.  When I told these people that I was going to Mexico City, many gave me the long look and said something to the effect of "be very careful."  Now, I understand that stories like this well lead to generalized concern about the entire country, but it really shouldn't.  True, there are certainly neighborhoods that one should avoid in Mexico's capital.  But this is also true of Washington, DC, and no one tells me to be careful going there. 

In other words, I think the fears about Mexico City might be exaggerated in the US press. 

3)  I have now been in a real Mexico City traffic jam.  I can safely say I don't want to be in another one. 

4)  Mexico will be hosting the G-20 leaders summit in 2012, which will be interesting timing, to say the least.  I had the good fortune to meet with some of the officials who will be managing the process, and I advised them to use the summit to announce their re-annexation of California let's just say there's some... uncertainty about how the G-20 will play out in the next few years. 

5)  It was pretty cool to discover that there are a robust number of zombie lovers in Mexzico.

More later when I catch up on the events of the day. 

You know, as insults go, this one is pretty bush league:

China's credit-rating agency on Tuesday downgraded its rating for U.S. sovereign debt and warned of further cuts, in a pointed move ahead of this week's Group of 20 major economies meeting.

Dagong Global Credit Rating Co. Ltd., the only wholly Chinese-owned rating agency, cut its rating on U.S. debt to A from AA, citing the Federal Reserve's move last week to initiate another round of asset buying, worth $600 billion. It also placed the U.S. sovereign credit rating on negative watch.

"The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar and the continuation and deepening of credit crisis in the U.S.," Dagong said.

"Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government's intention of debt repayment," the agency said.

Sounds very, very serious, until we get to this part of the story:

The downgrade of the U.S. rating by Dagong comes just over a month after the U.S. Securities and Exchange Commission denied the firm's application to officially rate bonds in the U.S.

At that time, Dagong called the SEC's move discriminatory and said it was considering legal action.

The SEC said in denying the application that "it does not appear possible at this time for Dagong to comply with the record keeping, production and examination requirements of the federal securities laws."

Indeed, even the New York Times' now-thrice-weekly story about rising Sino-American tensions observes:

In the rest of the world, the United States is still the strongest of credit risks, and the Chinese downgrade is not expected to have much real impact....

[T]hose critics, mostly countries that fear that recent American policy will devalue the dollar and undercut their competitiveness, do not appear poised to offer an alternative to an economic order that has been led by the United States since the end of World War II, or to the role the dollar has played for decades as the de facto world gold standard.

The Chinese, who have protested that the Federal Reserve is trying to unilaterally manipulate the dollar for the purpose of creating jobs at home, have been accused of doing exactly that for years - the root of many of the world's economic tensions today, in the eyes of Mr. Obama and his economic aides.

Look, clearly China is suffering from... an insult gap. Americans have been leading the world in trash-talking for decades now. China is trying hard to catch up, but I think the authorities in Beijing need some assistance in their game of catch-up.

I hereby call on all readers to offer, in the comments, ways that Chinese authorities can really sharpen their rhetorical jabs at the United States. In the spirit of kicking off the conversation, here are a few suggestions:

"Chinese Halitosis Institute Downgrades American Fresh Breath Index to BB: 'Seriously, What's The Deal With All The BBQ,' Asks Agency Head"

"Chinese Election Monitors Accuse Obama Administration of Rampant Ballot Fraud During Midterm Elections: 'It's No Myanmar, I'll Say That' According to Chief Monitor"

"Chinese Dietary Institute says American Food Leaves Them Hungry After Only 12 Hours"

Go to it.

According to Bloomberg, Brazilian Finance Minister Guido Mantega would like the real to stop appreciating and for the rest of the world to cooperate on currency matters:

Brazil's real dropped the most in two weeks after Finance Minister Guido Mantega raised taxes on foreign inflows for the second time this month to prevent appreciation and protect exports from what he called a global "currency war."

Brazil, Latin America’s largest economy, raised the so- called IOF tax on foreigners' investments in fixed-income securities to 6 percent from 4 percent. It also boosted the levy on money brought into the country to make margin deposits for transactions in the futures market to 6 percent from 0.38 percent…

"This currency war needs to be deactivated," Mantega told reporters. "We have to reach some kind of currency agreement.” …

Mantega cited the Plaza Accord of 1985, when governments agreed to intervene to devalue the U.S. dollar against the yen and the German deutsche mark, as the kind of agreement that might be required. International policy makers failed to narrow their differences on intervention in currency markets during the International Monetary Fund’s annual meeting this month.

Hey, you know, I bet the G-20 would be a decent forum for Mantega to foster this kind of cooperation. It's a good thing that there's a G-20 Finance Ministers meeting this weekend in Seoul. 

Wait, what's this Dow Jones story saying?

Brazilian Finance Minister Guido Mantega will not attend a meeting of Group of 20 member-country finance officials in South Korea this week, a Finance Ministry spokesman said Monday.

The spokesman said Mantega would remain in Brazil while the government studies possible introduction of foreign exchange policy measures to curb the strengthening of the country's currency, the real.

Brazil's government will be represented at the meeting by Finance Ministry International Affairs Secretary Marcos Galvao and Central Bank International Affairs Director Luiz Pereira.

Is this rank hypocrisy by Mantega? Not entirely. It's something worse -- a judgment by Brazil's policy principals that more will be accomplished by staying in Brasilia to stem the tide of inward capital flows than to go to Seoul to seek a multilateral solution to the current lack of macroeconomic policy coordination. 

There's plenty of blame to go around on this, but if Brazil thinks the G-20 is not going to accomplish much… then the G-20 is a dead forum walking. 

The People's Bank of China had a busy weekend. 

In response to the warning shot fired by this blog pressure from the G-20, the PBoC issued a statement on Saturday:

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility....

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

This is central bankese for, "yes, we're going to allow the RMB to float, get off our backs now." 

The central bank, the People’s Bank of China, said on Sunday that it was determined to “keep the renminbi exchange rate at a reasonable and balanced level of basic stability.”....

The issue has become a tricky one internally for the Chinese government. While China still muzzles its media through censorship, public opinion expressed on the Internet has become an increasingly influential force.

Even though some Chinese economists and most Western economists say that a stronger renminbi is clearly in China’s best economic interests — because it would help China fight inflation by making imports cheaper — many Chinese see the issue mainly in terms of a rivalry with the United States.....

The central bank’s statement on Sunday was issued only in Chinese and was clearly intended for domestic consumption. In contrast, its announcement on Saturday was issued almost simultaneously in Chinese and English.

Today, the PBoC also left the midpoint trading for the RMB unchanged, indicating that there would be no initial appreciation of the currency, unlike what transpired in 2005.  That said, the RMB appreciated by 0.42% today, its largest appreciaton in five years. 

The PBoC also released an English-language Q&A that elaborates its thinking.  This part is intriguing: 

As its economy becomes more opened, China´s major trading partners now include a long and diversified list. During the period of January-May this year, trading volume with top 5 trading partners (EU, the U.S., ASEAN, Japan and China´s Hong Kong SAR) accounted for 16.3 percent, 12.9 percent, 10.1 percent, 9.4 percent and 7.5 percent respectively in China´s total trade. Meanwhile, capital and financial account transactions have also diversified across various regions in the world. RMB´s floating with reference to any single currency can neither meet the diversified demand currencies in trade and investment with different partners, nor reflect its effective level. A basket of currencies can meet such demand and reflect the effective RMB level more accurately. Therefore, it is necessary for the managed floating exchange rate regime to be based on market supply and demand with reference to a basket of currencies, and thus make the RMB exchange rate more adaptive to market behaviors.  As China´s trading and investment partners become more and more diversified, it would be more appropriate for enterprises and households in China to switch their attention from just RMB-to-dollar exchange rate to the RMB´s value in terms of a basket of currencies.

So, has anything of significance happened? 

The Economist is doubtful.  The FT editorial team -- and Geoff Dyer in particular -- think the Chinese are being politically deft.  I have to concur.  China's aim is to do just enough to placate the G-20 without enraging its domestic producers and online nationalists.  By switching to a basket -- one in which the euro seems headed downward -- China has greater flexibility to do whatever the hell it wants with respect to the exchange rate. 

Going forward, I'm curious about the extent to which Chinese authorities will play up their domestic constraints.  It's very chic to point out the ways in which China's government does have to deal with nationalist pressures -- but the government also has an incentive to play those up as part of a two-level game.  One of the great unknowns is the extent to which Beijing can turn that nationalist sentiment up and down like a volume control.  I don't know the answer, and I'm not convinced that China-watchers know either.

Developing.....

Over the weekend, Paul Krugman trotted out his "let's pressure China" argument but expanded it to Germany.  This prompted some quality IPE snark from Kindred Winecoff, followed up by the same points written in less snarky fashion.  

Ordinarily, I would be eager to enter this debate full of vim and vigor.  Unfortunately, I spent the weekend at my college reunion at an important networking conference in which I drank a lot and caught up with old friends a lot of retrospective analysis and discussion took place over cocktails and I'm still exhausted from pretending to be a 21 year old for a few days still processing the exciting intellectual synergies that took place during the free-flowing dance party breakout sessions. 

Fortunately, I really don't have to add too much.  I'll just link to my old post about this debate and note that the questions I raised in that post have yet to be answered. 

Well, I'll say one more thing.  Between then and now, I've had the opportunity to enjoy a conversation with Krugman over dinner on these questions, and I think I can say where, exactly, we disagree.  He believes that, as the deficit country, the U.S. has vast reservoirs of economic power that can be exercised over China.  I would argue that the U.S. position is such that America can deter China but can't unilaterally compel the country to alter its own policies. 

More importantly, Krugman -- and most economists engaged in this debate -- are seriously underestimating the extent to which nationalism will affect China's response to any unilateral move by the United States.  Even if China's response to an increase in U.S. trade barriers would be counterproductive to their own economic interests, it might serve the regime's political interests.  In an ordinary world economy, China wouldn't want to do anything to upset its expoert engine.  In a world where the leading open economy basically says "f**k it," well, they're going to reassess.  Riding the nationalist tiger will look politically appealing in a slow-growth world. 

There's been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar.  Keith Bradsher's latest in the New York Times has the most detail, so let's look at his story: 

The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday....

The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.

The emerging consensus within the Chinese leadership comes as Treasury Secretary Timothy F. Geithner held meetings on Thursday with senior Hong Kong officials and prepared to fly on Thursday evening to Beijing for a meeting with Vice Premier Wang Qishan. 

Now, given the degree of hostility between China and the United States as late as last month, we have to ask the question:  what caused the shift in China's policy?  Bradsher provides multiple answers: 

China’s commerce ministry, which is very close to the country’s exporters, has strenuously and publicly opposed a rise in the value of China’s currency over the past month. But it appears to have lost the struggle in Beijing as other interest groups have argued that China is too dependent on the dollar, that a more flexible currency would make it easier to manage the Chinese economy and that China is becoming increasingly isolated on the world stage because of its steadfast opposition to any appreciation of the renminbi since July, 2008....

People with knowledge of the policy deliberations in Beijing said that Chinese officials had made the decision to shift the country’s currency policy mainly in response to an assessment of economic conditions in China, and less in response to growing pressure from the United States and, less publicly, from the European Union and from developing countries.

So, what's going on?  First, it's possible that the policy shift will just be a token move.  I'm confident that China won't appreciate as much as, say, Chuck Schumer wants.  That said,  this doesn't sound like a token-y move. 

If China's shift is a real one, there appear to be three possible sources of change:

1)  Domestic factors and actors convinced China's leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;

2)  China responded to mounting multilateral pressure and feared being isolated at the upcoming G-20 meetings. 

3)  China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war;

These are not mutually exclusive arguments, and we might never know exactly what caused China's .  But for the record, I think (1) and (2) maqttered a hell of a lot more than (3).  That said, I can't rule out the possiblity that their antics helped scare China into action. 

Yuan hawks like Paul Krugman and Fred Bergsten have been very silent as of late.  I'll be veeeery curious to read their reactions to this latest turn of events. 

Am I missing anything? 

Two weeks ago the New York Times' Keith Bradsher noted that China was not fully complying with information provision obligations at the G-20. 

Now the Financial Times' Chris Giles and Alan Beattie suggest that a growing number of G-20 players are venting their frustrations at China: 

Five prominent members of the Group of 20 leading economies, including the US and UK, sent a coded rebuke to China on Tuesday against backsliding on economic agreements.

In a letter to the rest of the G20 that shows frustration at slow progress this year, the leaders warned: “Without co-operative action to make the necessary adjustments to achieve [strong and sustainable growth], the risk of future crises and low growth remain.”

G20 officials said the letter – signed by Stephen Harper and Lee Myung-bak, the Canadian and South Korean leaders who will chair the group’s two summits this year, Barack Obama, US president, Gordon Brown, UK prime minister, and Nicolas Sarkozy, French president – was an attempt to restore flagging momentum to the international process.

Ottawa and Seoul are concerned that the G20 summits they will host, in June and November respectively, might fail to live up to expectations.

In a move that will irritate China, the five leaders specifically raised the issue of exchange rates in relation to reducing trade imbalances, a topic the G20 avoided in 2009 to help secure agreement at the London and Pittsburgh summits.

“We need to design co-operative strategies and work together to ensure that our fiscal, monetary, foreign exchange, trade and structural policies are collectively consistent with strong, sustainable and balanced growth,” the letter said....

As well as refusing to budge on its currency, China has been obstructing the G20 process this year. It has hampered efforts by the International Monetary Fund to issue a report which Dominique Strauss-Kahn, managing director, told the Financial Times in January would conclude that national strategies for growth around the world “will not add up”.

The leaders’ letter makes reference to the slow progress of this process, urging all G20 members to “move quickly” to “report robustly on what each of us can do to contribute to strong sustainable and balanced global growth”.

It's becoming increasingly difficult to figure out China's strategy here.  Lying low isn't going to work for much longer.  Ian Bremmer suggests that China has decided it doesn't need the United States anymore.  I'm not sure that's accurate, but even if it is, I'm pretty sure Beijing does need at least a few other countries in the G-20. 

Of course, maybe they think letters like this will lead to nothing. They might be right. Distrubingly, this same letter urges a completion to the Doha round.  Not that there's anything wrong with that.  At this point, however, pledges to complete the Doha round are kinda like my pledges to lose weight -- they're mostly ritualistic and have disturbingly little effect on actual behavior.  

If the exhortation  to redress macroeconomic imbalances falls into the same category, the G-20 will quickly acquire the perception of other dysfunctional multilateral structures. 

Question to readers:  will China find itself isolated at the G-20 if it continues its noncompliance? 

The Financial Times' Ben Hall reports that French president Nicolas Sarkozy is going to take advantage of France’s presidency of the G8 and G20 to do something serious in 2011:

Nicolas Sarkozy on Thursday stepped up his attack on global exchange rate imbalances saying “monetary disorder” had become “unacceptable”

The French president said he would make exchange rate policy an important theme of France’s presidency of the G8 and G20 forums of advanced and developing economies in 2011....

With a large trade deficit and with exports that are more price-sensitive than Germany’s, France feels more susceptible to exchange-rate movements than its neighbour across the Rhine.

“We can’t increase the competitiveness of our businesses in Europe and have the dollar lose 50 per cent of its value against the euro,” Mr Sarkozy said. “When we produce in the eurozone and sell in the dollar zone, are we supposed to just give up selling?”

“You know how close I feel to the US. But this is not possible. The world has become multipolar. We must have a multi-monetary system.”

In the wake of the failure of the Copenhagen climate conference to set ambitious, binding targets for reductions in carbon dioxide emissions, the French president also reiterated his demand for a carbon tax on imports to the EU from countries that sign up to “no environmental rules”.

However, he gave little indication how France could push forward with the idea, given opposition in Germany and elsewhere in the EU, and France’s recent diplomatic efforts to improve ties with Beijing (emphasis added)

That last paragraph ably sums up Sarkozy's problem, which is that he makes grandiloquent pronouncements but has almost no ability to follow through on them. 

Sarkozy's ability to influence currency politics in particular is limited at best -- not to mention contradictory.  Any diversification away from the dollar as the world's reserve currency will mean an appreciating euro, not a depreciating one, as more public and private actors try to get their hands on the currency.  This appreciation could be prevented if the European Central Bank decided to pursue an looser monetary policy.  Which I'm sure they will do.... right after cheese-eating surrender monkeys come flying out of Sarkozy's derriere.  Oh, and there's also the small matter of ECB president Jean-Claude Trichet wanting nothing to do with a globalized euro. 

I suspect none of this will silence Sarkozy -- but his words aren't going to change anything either. 

Over at the Financial Times, Gideon Rachman looks back at the G-20 Pittsburgh summit and thinks that Europe will take over the G-20 process: 

The realisation that the G20 is Europe’s Trojan horse struck me at the G20’s last summit in Pittsburgh a couple of weeks ago. The surroundings and atmosphere were strangely familiar. And then I understood; I was back in Brussels, and this was just a global version of a European Union summit.

It was the same drill and format. The leaders’ dinner the night before the summit; a day spent negotiating an impenetrable, jargon-stuffed communiqué; the setting-up of obscure working groups; the national briefing rooms for the post-summit press conferences.

All of these procedures are deeply familiar to European leaders – but rather new to the Asian and American leaders whom the Europeans are carefully entangling in this new structure. Watching an Indonesian delegate wandering, apparently carefree, through the conference centre in Pittsburgh, I felt a stab of pity. “You don’t know what you are getting into,” I thought. “You are going to waste the rest of your life talking about fish quotas.” (Or, this being the G20, carbon-emission quotas.)

The Europeans did not just set the tone at the G20 – they also dominate proceedings, since they are grossly over-represented. Huge countries such as Brazil, China, India and the US are represented by one leader each. The Europeans managed to secure eight slots around the conference table for Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Most of the key international civil servants present were also Europeans: Dominique Strauss-Kahn, head of the International Monetary Fund; Pascal Lamy of the World Trade Organisation; Mario Draghi of the Financial Stability Board.

As a result, the Europeans seemed much more tuned into what was going on than some of the other delegations. Puzzling over the new powers given to the IMF to monitor national economic policies in the Pittsburgh conclusions, I was interrupted by an old friend from the European Commission, who recognised the language immediately. “Ah yes,” she said, “the open method of co-ordination.”

Hmmm..... no, I'm not buying this.  Or, to put it another way, if the G-20 is a European plot, then it would be the worst plot since.... insert your least favorite M. Night Shyalaman film here.

Sure, the Europeans are overrepresented at the G-20.  But compare that to the G-8, where (when you factor in the EU), they occupied more than half of the chairs around the table.  The G-20 doesn't augment the power of Europe -- it dilutes it. 

This interpretation fits with what I heard from some of the G-20 participants as well.  There was a surprising degree of common cause between the BRIC economies and the United States in the run-up to Pittsburgh.  Given the outcome, there is an obvious explanation for the BRIC economies' behavior. 

Why did the U.S. go along?  Washington maintains stronger bilateral ties with each of the other G-20 members than most do with each other.  If one thinks of the United States as the central node in a more networked governance arrangement, then one can see how the reforms made to date do not weaken American influence.  The primary loser, then, is Europe.

Maybe Gideon will be proven correct -- it's certainly true that the Europeans might have a comparative advantage in this kind of diplomatic death-by-detail approach.  On the other hand, the Americans and Russians aren't exactly newbies at this.  The Chinese and Indians have been moving down the learning curve pretty fast.  And the Brazilians already have a reputation for being diplomats who punch above their weight. 

Developing....

To put it gently, international macroeconomic policy coordination has not had a glorious history over the past century.  Usually, the domestic political and economic costs were large enough to impede most efforts to coordinate.  Sham coordination was far more common than genuine coordination. 

Most successes in global policy coordination occurred when two of the following three conditions held.  First, when there was a state powerful enough to go it alone, coordination was usually a matter of the hegemon unilaterally providing the necessary public goods to facilitate coordination (see:  Marshall Plan, Dodge Line).  Second, when countries were being asked to take actions that boosted their domestic economies, they were willing to coordinate policy.  Contractionary fiscal or monetary policies have proven to be far more difficult to coordinate than expansionary actions.  Third, policymakers needed to be right on the economics.  Agreements to coordinate on an unsustainable set of policy prescriptions - such as the interwar gold exchange standard, Bretton Woods, or the Growth and Stability Pact - had a short half-life. 

Now, to give the G-20 some credit, this current crisis has led to greater levels of coordination than in the past -- and more than I expected.  This might be a function of policy learning from the debacles of the interwar period.  But it could also the fact that, to date, governments have been asked to pursue expansionary policies.  Each country was going to do something like what they are doing anyway -- the G-20 just acted as a useful focal point to cajole some of the more reluctant countries. 

What happens when it's time to clamp down?  Australian PM Kevin Rudd and South Korean President Lee Myung-bak proffer some recommendations in the Financial Times for the hard part of macroeconomic policy coordination: 

At Pittsburgh, G20 leaders should agree to a three-stage process. First, national governments should develop their own national strategies for recovery. Second, they should agree to deliver these strategies to the International Monetary Fund before the end of the year and ask the IMF to report back on their consistency with balanced and sustained global growth. Third, G20 leaders should meet again in 2010 (when South Korea is the chair of the G20) to agree their responsibilities and actions to achieve this goal within the framework of post-crisis global economic management. 

Steps one and two make a great deal of sense, and even have a good chance of being implemented.  The wording of step three is a bit vague, for it to mean anything it boils down to, "make everyone scales back on priming the pump in a coordinated manner." 

If that actually happens, well, tip your cap to the G-20, because the G-7 -- a much more homogenous group of countries -- never succeeded at that task. 

Question to readers:  does the G-20 have a chance in hell of succeeding in their next task?