by Jacob Funk Kirkegaard, Peterson Institute for International Economics
Introductory Statement for the Public Hearing on Global Economic Governance before the European Parliament Committee on Economic and Monetary Affairs, Brussels
June 27, 2011
Committee Chair Bowles, Rapporteur Hökmark, and members of the Committee, I appreciate the opportunity to appear before you today to discuss the issue of global economic governance. I will focus my brief introductory remarks on the G-20, the International Monetary Fund (IMF), and the role Europe should play in both.
As the uneven global economic recovery continues with the emerging economies growing at roughly three times the pace of advanced economies1, comprehensive reform of the principal institutions through which global economic governance is enacted becomes ever more urgent. With emerging economies already accounting for about half of the global economy and the vast majority of current and future global economic growth, securing an adequate voice for this traditionally underrepresented group in global economic governance must be a priority.
The establishment of the G-20 as "the premier forum for our international economic cooperation" [pdf] by G-20 leaders in Pittsburgh marked a seminal step forward for truly global economic governance through its permanent inclusion of the largest emerging economies. However, while the G-20 provided invaluable policy coordination during the early crisis response in 2008–09, the ability of the G-20 to independently promote substantive improvements in global economic governance during "noncrisis periods" remains questionable.
The inclusion of more countries and the gradual ad-hoc expansion of the G-20 agenda to suit the political wishes of rotating presidencies are factors unlikely to produce further tangible advances in global economic governance. Instead, in the continued absence of a G-20 macroeconomic policy consensus, its "summit format" and foundation on "voluntary cooperation," lacking any formal obligation for its membership to subject their domestic economic policies to any mutually agreed global standards, seem less and less likely to deliver concrete and verifiable policy actions to support the G-20’s own stated foremost goal of strong, sustained, and balanced global economic growth.
Accordingly, the lasting substantive global economic governance value of the G-20 itself may be limited to that of a "latent forum," which leaders can activate in times of global economic crises to coordinate an urgently needed global response.
Acknowledging these accelerating shortcomings, the G-20’s principal global economic governance task should be to seek to strengthen the operations of existing capable global economic institutions. In this regard, the G-20’s record of utilizing the expertise of such institutions as the IMF, World Bank, the Organization for Economic Co-operation and Development (OECD), and the Financial Stability Board (FSB) is encouraging.
To promote genuine progress in global economic governance through the G-20, European policymakers should consequently first and foremost resist the temptation to overburden the G-20 topical agenda with subjects of peripheral importance to the central objective of achieving strong, sustained, and balanced global economic growth.
Secondly, European policymakers must push G-20 leaders to advance the role of especially the IMF in global economic governance. Such an expansion of the IMF role ought sensibly to include both additional IMF resources and an enhanced role in domestic policymaking—including in Europe—of IMF surveillance and recommendations.
The global financial crisis reaffirmed the IMF as the systemically most important global financial institution in the world economy. Correspondingly, as mentioned, strengthening the IMF’s institutional role and governance structure is of paramount importance. Europe’s role in this process is vital, and a sober assessment of Europe’s strategic long-term interests consequently critical.
As a declining part of the global economy, Europe must realize that its overarching strategic interest lies in sustaining the global legitimacy of particularly the IMF and other existing global economic governance institutions, thereby shielding them from potential threats from new institutional designs originating outside the traditional G-7 countries. Sustaining the legitimacy of such existing global institutions, in whose establishment, design, leadership, and current modus operandi Europe historically played a far larger role than its future global economic weight dictates, is far more important for Europe’s continuing impact on global economic governance than maintaining its current representation levels in the management of the IMF (and other global economic governance institutions).
Consequently, it is firstly in Europe’s self interest to expeditiously implement the currently agreed transfer of part of its IMF voting rights to emerging economies and reduce the European representation on the IMF Executive Board. Secondly, to further improve the external representation of the euro and also mirroring the ongoing deepening of euro area domestic economic governance, transitioning to a single unified and sizable euro area representation on the IMF Executive Board is appropriate. Such a euro area consolidation effort should further sensibly be replicated among the noneuro members of the European Union, leaving Europe in the longer term with a globally credible representation of two vote-heavy seats on the IMF Executive Board.
Lastly, it is evident that Europe’s strong interest lies in faithfully establishing an open merit-based selection process for the top leadership positions at the IMF and other global economic governance institutions without any reference to the nationality of the candidate or the principal geographic area of operations of the organization in question.
Europe has a clear constructive role to play by promoting, on merits alone, its current strong candidate for IMF managing director, whose selection would verify that an "open merit-based selection process" does not preclude that a representative from a particular region of the world may succeed another. The damaging practice of "regional rotation," acceptable in the leadership selection for global institutions of limited practical relevance, must not be instituted at organizations such as the IMF with critical operational roles in the global economy.
I thank you for the opportunity to address the Committee today and look forward to answering any questions you might have.
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Book: Resolving the European Debt Crisis March 2012
Working Paper 12-12: Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach August 2012
Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012
Policy Brief 12-5: Interest Rate Shock and Sustainability of Italy's Sovereign Debt February 2012
Speech: Italy's Effect on the Global Economy February 9, 2012
Policy Brief 12-4: The European Crisis Deepens January 2012
Policy Brief 11-21: What Can and Cannot Be Done about Rating Agencies November 2011
Policy Brief 11-13: Europe on the Brink July 2011
Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011
Policy Brief 10-27: How Europe Can Muddle Through Its Crisis December 2010
Policy Brief 10-14: In Defense of Europe's Grand Bargain June 2010
Op-ed: Greek Deal Lets Banks Profit from "Immoral Hazard" May 6, 2010
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Book: Transforming the European Economy September 2004