With the many financial calamities happening throughout the world of late, it would seem that the scheduling of a major event to discuss key issues in the global economy would be announced with great fanfare.
The G20 meeting of finance ministers and central bank governors that took place over the weekend seemed to have sneaked in almost surreptitiously. I was hard pressed to find many announcements of the September 3-4th meeting in Istanbul despite the fact that the date was reserved several months ago. Could it be that this was an indication of the failing influence of this group in bringing about any consistent and durable effect on global markets?
The G20 is viewed as the most important forum of global governance and cooperation, largely replacing the once powerful G7
G7, G8, G20
What exactly is the G20 and what is its role in the global financial scene?
The Group of Twenty (G20) Finance Ministers and Central Bank Governors met for the first time in December 1999 in Berlin in order to coordinate efforts in helping industrialized and developing economies and to discuss key issues in the global economy. It was hosted by German and Canadian finance ministers.
The original concept of international financial figures meeting collectively goes back much further than 1999, however. It was introduced in 1971 with the collapse of the Bretton Woods system of fixed international exchange rates which up until then had been tied to the price of gold. With the 1973 oil crisis, the need for better coordination of economic and financial policy at the executive level became even more evident and on March 25th, 1977, finance ministers from Britain, France, Germany and the United States met and formed the “Library Group,” named after the venue of their initial meeting — the White House Library. This group became known as the Group of Five or G5. Japan joined the group in September of that year, and Italy was invited to the first meeting held in France in 1974.
In 1976, the group became G7 with the addition of Canada and Russia officially joined in 1997 changing the name of the assembly to G8.
Democratic and U.S. Allied
The initial make-up of the group clearly represented the dominant economic powers of the day, and they were all democratic and militarily allied with the United States. The agenda of the meetings focused mostly on economic and financial issues but over the years, a broader range of topics was discussed such as security matters and the environment.
By the 1990’s, however, their focus returned to global economics when a series of financial crises centered mostly in Latin America and Asia convinced the G7 finance ministers that key emerging economies were not represented sufficiently in their global economic management efforts and that there was a need to include a host of new players in important decision making.
Asian Financial Crisis
The Asian financial crisis started in Thailand in 1997 with the collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate. This led to a drastic cut in its peg to the U.S. dollar and as the crisis spread, most of Southeast Asia and Japan experienced slumping currencies, devalued stock markets and other asset prices, and a swift rise in private debt.
Following four initial meetings in 1998 and 1999, in December 1999 it was decided to expand the group to a set number of 20 delegates consisting of the G8 along with key regional powers plus the European Union which had emerged by that time as a key player in global finance.
In 2008, the first G20 Leaders Summit was held to deal with the financial crisis that was threatening to engulf global markets. G20 leaders have met eight times since then, and a Leaders Summit now takes place each year.
The G20 is made up of the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States of America.
The remaining seat is held by the European Union, which is represented by the rotating Council presidency and the European Central Bank. The G20 has no permanent staff of its own. Its chair rotates between members and is selected from different regional groupings each year. Additionally, there are no formal votes or resolutions on the basis of fixed voting shares or economic criteria; every G20 member has one voice with which it can take an active part in G20 activity.
G20 members represent around 85 per cent of global gross domestic product, over 75 per cent of global trade, and two thirds of the world’s population. The G20 is supported by policy analysis and advice from a number of international organizations including the Financial Stability Board, the International Labor Organization, the International Monetary Fund and others.
Turkey Summit
In the wake of recent global financial crises, the G20 is viewed as the most important forum of global governance and cooperation, largely replacing the once powerful G7. At the summit that has just ended in Turkey it was decided that the group must step up reform efforts to boost disappointingly slow growth, pointing to ultra-low interest rates as not enough of an action to accelerate economic expansion.
After the 2-day summit, one leader voiced optimism saying that “they were confident growth would pick up and, as a result, interest rates in ‘some advanced economies’ would have to rise.”
What effect this could have on the current financial situation is uncertain. A report released recently by the European Central Bank that followed the eight group summits during the period of 2007 to 2013 and concluded that these meetings and their recommendations had no consistent and durable effect on any of the related markets. The research data suggested disappointingly that the information and decision content of G20 summits has been of limited relevance for market participants.