G20 finance meeting to set aside geopolitics, focus on economics
With their countries deeply divided over Israel’s attacks on Gaza, finance officials from the Group of 20 major economies are poised to set aside geopolitics and focus on global economic issues when they meet in Sao Paulo, Brazil this week.
Brazil, keen to ensure a productive session that delivers consensus on key economic priorities, has proposed a much shorter closing statement than seen in recent years – a move already negotiated with other members, according to a Brazilian government source and two sources familiar with the draft.
The South American country is the current G20 president.
The latest draft, still being finalized, mentions the risks of global fragmentation and conflicts in general terms but omits any direct reference to Russia’s invasion of Ukraine or the Israel-Gaza war, the sources said.
Finance officials and central bankers from the U.S., China, Russia and the world’s other largest economies will meet in Sao Paulo to review global economic developments at a time of slowing growth, the growing strains of record debt burdens, and worries that inflation may not yet be tamed, which are keeping interest rates high.
The International Monetary Fund last month said the chance of a “soft landing” in which inflation falls without triggering a painful global recession had increased, but warned that overall growth and global trade remained lower than the historical average.
Russia’s invasion of Ukraine almost exactly two years ago roiled the G20, exposing long-simmering fault lines within the group and thwarting efforts by G20 officials to reach consensus on a final statement, or communique, after their meetings.
India and Indonesia, which held the G20 presidency before Brazil, opted for chair statements summarizing areas of agreement and noting dissenting voices – namely Russia – but even that could prove difficult given the bitter divisions over the four-month war in Gaza. The war erupted when the ministers last met in Marrakech, Morocco in October, intensifying divisions between the United States and its Western allies, and non-Western countries in the G20.
Brazil, Saudi Arabia and South Africa have been outspoken critics of Israel’s relentless assault on Gaza since the Oct. 7 surprise attack in which Palestinian Islamist group Hamas killed around 1,200 people and seized 253 hostages, one G7 source said. The retaliatory attacks have killed more than 29,000 Palestinians, according to the Gaza health ministry.
The U.S., meanwhile, last week vetoed a draft United Nations Security Council resolution on the Israel-Hamas war, blocking a demand for an immediate humanitarian ceasefire and pushing instead for a temporary ceasefire linked to the release of the remaining hostages held by Hamas.
The deep differences over Gaza necessitated a different approach this year, the Brazilian official said, adding, “If the topic is included, there will be no consensus.”
To prevent differences over Gaza from derailing progress on economic issues, Brazil proposed a shorter statement with no specific mention of either war. Washington argued against language holding Israel accountable, which South Africa and others had argued was needed if the statement mentioned and condemned Russia’s war against Ukraine, a G7 source said.
G7 finance officials, also meeting in Sao Paolo, will be forceful in their condemnation of Russia and its war, a second G7 source said.
‘BROADER ETHOS’
Brazil wants to focus this week’s discussions on ending inequality and hunger, reforming international taxation, addressing sovereign debt distress and working toward sustainable development. Reforms of multilateral banks and climate finance will feature more prominently at the spring meetings of the IMF and World Bank in Washington in April, the Brazilian source and a G20 source said.
Mark Sobel, the U.S. chair of the Official Monetary and Financial Institutions Forum (OMFIF), said stripping geopolitics from the communique made sense for a group that had historically focused on economic and financial issues.
“Yes, it reflects fractiousness, but it also reflects this broader ethos of the finance ministers and central bankers to focus on economic and financial matters in a technical way,” he said.
One G7 official said the statement would likely be “concise and ambiguous, only mentioning issues where there’s no contention.”
U.S. Treasury Secretary Janet Yellen plans to underscore the importance of the G20 body, highlighting collaborative efforts to address global challenges such as sovereign debt and the COVID-19 pandemic, a senior U.S. official said.
Yellen will meet with Brazilian Finance Minister Fernando Haddad to celebrate 200 years of U.S.-Brazil relations, an event the Brazilian official said was designed to highlight the South American country’s “interest in not embracing a divisive approach, but focusing on constructive efforts.”
One unresolved issue is to what extent the U.S., Japan and Canada will prevail in demanding a mention of the economic impacts of geopolitical conflicts in the communique, the first Brazilian official said.
But the failure of G20 foreign ministers to include the issue sent a strong signal, the official said.
“The outcome of the sherpas meeting strengthens our understanding that the topic (of geopolitics) should not be included in the communique.”
Eric Pelofsky, a former senior U.S. official now with the Rockefeller Foundation, said there was value in meeting in configurations like the G20, despite clear differences.
“Sometimes talking without success is still talking. Maybe that means that at the end of the day, somebody has a coffee that they weren’t supposed to have and they find a bit of common ground that they weren’t supposed to know existed.”
Source: Reuters
FLORENCE – The 25th anniversary of the euro’s introduction, which has passed largely under the radar, offers an opportune moment to assess the current state of the greatest monetary experiment in modern history.
The euro’s launch in January 1999 polarized economists. In the face of much skepticism – the late American economist Martin Feldstein even argued that the single currency could trigger a war in Europe – the euro’s architects envisioned a future characterized by macroeconomic stability, anchored by an independent central bank and a fiscal framework geared toward stability. Structural reforms, which the European Union’s member states were expected to implement, were meant to enhance the monetary union’s capacity to adjust to shocks.
None of those scenarios materialized. Over the past quarter-century, the euro has shown extraordinary resilience, navigating through several critical challenges and defying early predictions of its collapse. But while the single currency has delivered on some of its promises – most notably, maintaining price stability for most of its existence – it has failed to boost Europe’s potential growth or facilitate the continent’s full economic and political integration.
This mixed record can be attributed largely to the fact that Europe’s economic union was incomplete from the outset. Despite the significant progress that has been made since its inception, the eurozone’s fiscal and economic frameworks remain woefully underdeveloped compared to its monetary infrastructure.
To understand the consequences of the eurozone’s unfinished architecture, it is useful to divide the past 25 years into four distinct periods. The first phase, from 1999 to 2008, could be labeled the “2% decade”: economic growth, inflation, and budget deficits (as a share of GDP) all hovered around this rate. This phase was characterized by the excessive optimism of the “Great Moderation.”
But the internal imbalances that emerged during this period would haunt the eurozone for years to come. The convergence of interest rates, evidenced by minimal spreads, resulted in overly sanguine portrayals of member states’ public finances. Simultaneously, loose fiscal and monetary conditions reduced European governments’ incentives to undertake structural reforms and bolster their banking systems.
Nominal convergence also masked more profound structural disparities, as capital flowed from the eurozone’s richest members to their poorer counterparts, where it was frequently channeled into less productive sectors, such as real estate and non-tradable services, often through instruments like short-term bank loans. Consequently, while the eurozone’s current accounts appeared balanced, significant imbalances emerged.
The fallout from the 2008 global financial crisis, particularly the discovery that Greece had lied about its budget deficits and debt, eroded trust among member states. The prevailing narrative shifted to one of moral hazard, emphasizing the need for each country to get its own house in order. By the time eurozone governments finally coordinated a response – establishing the European Stability Mechanism (ESM), launching the banking union project, introducing the European Central Bank’s Outright Monetary Transactions program, and expanding the ECB’s balance sheet – the euro appeared to be on the brink of collapse.
The key turning point was the pledge by then-ECB President Mario Draghi to do “whatever it takes” to preserve the euro in July 2012. But with monetary policy increasingly viewed as the “only game in town,” the eurozone’s economic and financial structures remained fragmented.
The COVID-19 crisis changed that. The exogenous nature of the pandemic shock, together with the lack of impending elections, enabled EU leaders – led by French President Emmanuel Macron, then-German Chancellor Angela Merkel, and European Commission President Ursula von der Leyen – to present a unified front, unencumbered by the pressure to avoid moral hazard. The EU suspended the Stability and Growth Pact, which had previously capped member states’ budget deficits at 3% of GDP, and rolled out the Support to mitigate Unemployment Risks in an Emergency and the NextGenerationEU recovery programs, financing both through common borrowing. Meanwhile, the ECB introduced its €1.85 trillion ($2 trillion) Pandemic Emergency Purchase Program.
Although this demonstration of collective leadership reassured markets, fueling an economic rebound, the optimism proved to be short-lived. A global inflationary surge, fueled by robust macroeconomic stimulus and pandemic-related supply-chain disruptions, was exacerbated by the energy-price shock that followed Russia’s full-scale invasion of Ukraine. Although European policymakers worked together to reduce the EU’s dependence on Russian gas, they failed to mount a collective response akin to the NextGenerationEU initiative. Confronted with rising deficits and debt, not to mention the most aggressive monetary-tightening cycle since the 1980s, EU countries have once again put eurozone reforms on hold.
Two important lessons follow from the euro’s first 25 years. First, the monetary union’s incomplete institutional framework has proven to be both costly and dangerous. Finalizing the banking union, especially the creation of a common resolution fund with the backstop of the ESM and deposit insurance, is essential to ensure stability and bolster the international role of the euro. Thus, Italy’s recent failure to ratify the ESM treaty is a serious setback. Pushing forward the capital market union is essential if Europe is to meet the financial challenges posed by the digital and green transitions. To achieve all of this, EU leaders must strike a balance between risk sharing and risk reduction.
Second, completing the euro is crucial for safeguarding and developing the EU’s greatest achievement: the single market. European countries’ current pursuit of national industrial policies, funded through state aid, undermines the core values of the single-market project. To address this challenge, the EU must formulate a cohesive European industrial policy. This should include an increase in cross-border investments, focusing on European public goods such as human-capital development, the availability of critical materials, and the green and digital transitions.
After the fall of the Berlin Wall, German Chancellor Helmut Kohl, French President François Mitterrand, and European Commission President Jacques Delors turned the dream of a single currency into a reality. During the COVID-19 crisis, Macron, Merkel, and von der Leyen managed to overcome seemingly insurmountable obstacles and achieve a historic breakthrough. Now, a quarter-century after its introduction, the euro requires visionary leaders to shepherd European sovereignty to its next phase.
This article draws on the CEPR Policy Insights February 1, 2024, paper “The First 25 Years of the Euro,” written under the auspices of the European University Institute’s Economic and Monetary Union Laboratory (EMU Lab).