Why the G-8 should step aside for the G-2 and G-20 -- as soon as possible.
Ballgames have always been a popular metaphor for managing global affairs. So, let’s consider how we might describe the next decade’s G-something international relations in terms of sport.
Recent trends suggest we might be headed for a Wimbledon epic: the existing tennis champion and the young contender dominate the tournament for a generation. As the United States and China — the G-2 — battle it out for the prize again and again, the semifinal losers, Europe and Japan, will have to sit and watch from the sidelines along with those not yet big enough to join the heavy hitters. When some more-familial sporting activity is needed, then G-20 can take a turn at playing social handball.
This scenario leaves the G-8, now meeting at its summit in L’Aquila, Italy, about as relevant, and chaotic, as an amateur doubles tournament. With NATO taking care of defense issues, the G-8 countries — Britain, Canada, France, Germany, Italy, Japan, Russia, and the United States — form a more and more obsolete grouping. (Perhaps this explains the large number of additional invitations to the summit: to create an agenda and a list of successes.)
What’s really going on?
First, the financial crisis has rendered the G-8 economies less important. Real power-broking inevitably moves with economic muscle, just as sponsorships and advertising contracts follow the tennis champs. So as Europe and Japan continue to slide into a deeper and prolonged economic trough, their power is inevitably eroding. U.S. hegemony is increasingly challenged as well.
Second, among G-8 countries, there is no common vision when it comes to economic policy priorities and growth targets. Over the last year, efforts to coordinate a strong reaction to the financial crisis have floundered at a time when they were most essential. Meetings of other organizations — such as the G-20, the European Union, and the International Monetary Fund — proved far more effective and decisive.
It is increasingly hard to see how the G-8 can survive as a vital forum. The heads of state assembled cannot possibly agree upon a coordinated oil-market strategy, for instance, without inviting oil suppliers to join. France’s efforts to use the summit to address oil-market speculation are interesting, but trying to create any energy agreements without OPEC and other major players seems misguided. Nor is it clear what specific role the G-8 — as opposed to the G-20 — has to play is in relation to global food and climate change. Many politicians have indicated that they plan to use the G-8 to discuss climate change, but again, the real action is happening elsewhere: any Kyoto II-type agreement will take place this December in Copenhagen.
But there is still one pressing issue that G-8 leaders should take up in L’Aquila, one that is their problem to solve: the status of the banks. Many analysts think that leverage has not been sufficiently reduced and that there are still substantial toxic assets and bad debts on banks’ books. The continued malfunctioning of the interbank market indicates that trust has not returned, while the tightness of credit markets and high spreads are holding back economic recovery. Virtually all of the major, globally interconnected banks reside in G-8 countries. Thus, resolving continuing threats and placing these banks on sure footing should be the key G-8 issue.
Although the G-8 members may not agree on how to manage the crisis in terms of macroeconomics, they do share a common cause in steadying their fragile banking systems. Future turbulence in banking seems more likely than not. Some reports have indicated the worst is not over in the U.S. mortgage market. Major European banks are still struggling, given the repercussions of the slump in Eastern Europe and homegrown threats in the construction sector (emanating from countries such as Spain and Ireland). Heads of state at the summit should share information on the state of their banks and discuss whether to continue existing programs for resolving the banking crisis or create new funds and tools for the financial sector.
If this critical issue is not on the table and attention is diverted instead to issues that appear more G-20 than G-8, then this may signal two things: European policy paralysis, in part because of the forthcoming German elections, and that the G-8 sees no further function of its own that it can usefully perform.
When the crisis really is over, the G-20 has matured, and the real action to watch is on center court at the G-2, there might truly be no function left for the G-8. But before it closes down, its last phase should include oversight of any last vestiges of the crisis in the Western banking system and planning the exit strategy from the exceptional measures taken during this crisis — preferably a carefully coordinated effort at the appropriate time. After this, it will be time for an elegant exit for the G-8 itself — Pete Sampras, who left the game on top, might serve well as the role model.