Monday, 17 November 2008

G20 marks the end of American dominance

It is very easy to be disappointed at the statement released at the conclusion of the G20 Meeting in Washington in the weekend. Its carefully crafted words made it clear that there is no agreement on a coordinated effort to stave off the global recession. No joint effort even if the most recent data points to the fact that economic growth is falling off a cliff in many countries, and not only in the USA. However, it is also clear that even if there is no coordinated effort, the various countries will do whatever they can in terms of fiscal stimulus.

There was also a pledge not to use protectionist measures in order to protect the respective economies. But that apart the meeting appeared to have focused a lot on the massive regulatory failure that lies behind the current quagmire. In this respect the meeting was very important.
For starters, it was a G20 meeting and not the typical G7/8 meeting. This in itself is an important recognition that the G7, while not irrelevant, is not the right forum for this kind of meetings. While G7 represents about 55% of the world economy, the rest of the world now represents 45% and it is growing much faster than the G7. Some of the countries outside the G7 hold the world’s largest currency reserves, courtesy the US current account deficit.
When the participants of the meeting now begin to talk about a reform of the global financial system, it is simply a recognition that the monopolar world system created after WW2 is now about to be replaced by a multipolar system.

The global economic system of the post-war era, known as the Bretton Woods, had one anchor, namely the USA, whose economic and military might was considered unassailable. This situation has changed dramatically under the Bush Administration. Or at least it has become clear how much it has changed.

USA is now the world’s largest debtor. Its banking system is in ruins. Its manufacturing sector has largely been dismantled and moved to China. The car industry is about to go belly up. So even if the US economy still is a powerhouse of invention, it finds itself in a dramatically reduced position as an international player.

The US military might is still frightening. But the inability to win a resounding victory over insurgents in a smallish Arab country has not been lost on many.
In other words, the rest of the world does not any longer see the USA being able to dictate the conditions for economic and political cooperation. The content of the statement concluding the G20 meeting reflects this fact.

The bulk of the text is about a reform of the international economic system. If all the elements of the text are in fact implemented, the US will have to accept that its financial watchdogs are essentially a part of an international system and must adhere to international standards. US regulators will have to adhere to rules for transparency. Its accounting laws will have to be harmonised. Risk models and risk accounting will be harmonised with the rest of the world.
Its banks will be forced to operate under conditions that will look much like how the rest of the world operates (and become dramatically less profitable).

The sacred right of US CEOs to receive silly amounts of money as remuneration will be subject to a review securing that CEOs cannot enrich themselves by increasing risk for the banking sector.

Credit rating agencies (where the US has had a virtual monopoly) will see their influence and business reduced and controlled). An international clearing institution for certain financial derivatives(CDS’s) will effectively remove them from being controlled by US banks. All banks – including US banks - operating cross border will be subject will be under international supervisory committees.

On top of that, tax havens that contribute to the financial instability will be targeted (read Cayman Islands, the home of most hedge funds of this world).

Most of this is sufficiently technical not to attract the interest of the average audience. And it is absolutely certain that the USA will try by hook or by crook not to let herself be tied into such an international structure as it influences something as important as the US banking sector. There will be rearguard action by the truckload.

Yet, the G20 meeting marked something very important: The end of US financial dominance.

No comments: