THIS ARTICLE FIRST APPEARED IN THE FINANCIAL TIMES
The forthcoming Group of 20 meeting is a make-or-break event. Unless it
comes up with practical measures to support the less developed countries, which
are even more vulnerable than the developed ones, markets are going to suffer
another sinking spell just as they did last month when Tim Geithner, Treasury
secretary, failed to produce practical measures to recapitalise the US banking
This crisis is different from all the others since the end of the second
world war. Previously, the authorities got their act together and prevented the
financial system from collapsing. This time, after the failure
of Lehman Brothers last September, the system broke down and was put on
artificial life support. Among other measures, both Europe and the US in effect
guaranteed that no other important financial institution would be allowed to
This necessary step had unintended adverse consequences: many other
countries, from eastern Europe to Latin America, Africa and south-east Asia, could not offer similar guarantees. As a result,
capital fled from the periphery to the centre. The flight was abetted by
national financial authorities at the centre who encouraged banks to repatriate
their capital. In the periphery countries, currencies fell, interest rates rose
and credit default swap rates soared. When history is written, it will be
recorded that – in contrast to the Great Depression – protectionism first
prevailed in finance rather than trade.
Institutions such as the International Monetary Fund face a novel task: to
protect the periphery countries from a storm created in the developed world.
Global institutions are used to dealing with governments; now they must deal
with the collapse of the private sector. If they fail to do so, the periphery
economies will suffer even more than those at the centre, because they are
poorer and more dependent on commodities than the developed world. They also
face $1,440bn (€1,060bn, £994bn) of bank loans coming
due in 2009. These loans cannot be rolled over without international aid.
Gordon Brown, the UK
prime minister, recognised the problem and designated the G20 meeting to
address it. Yet profound attitudinal differences have surfaced, particularly
between the US and Germany. The US has
recognised that the collapse of credit in the private sector can be reversed
only by using the credit of the state to the full. Germany, traumatised by the memory
of hyperinflation in the 1920s, is reluctant to sow the seeds of future
inflation by incurring too much debt. Both positions are firmly held. The
controversy threatens to disrupt the meeting.
Yet it should be possible to find common ground.
Instead of setting a universal target of 2 per cent of gross domestic product
for stimulus packages, it is enough to agree that the periphery countries need
aid to protect their financial systems. This is in the common interest. If the
periphery economies are allowed to collapse, the developed countries will also
As things stand, the G20 meeting will produce some concrete results: the
resources of the IMF are likely to be doubled, mainly by using the mechanism of
the “new arrangements to borrow”, which can be activated without resolving the
vexed question of reapportioning voting rights.
This will be sufficient to enable the IMF to help specific countries at risk
but it will not provide a systemic solution for the less developed countries.
Such a solution is readily available in the form of special drawing rights.
SDRs are complex but they boil down to the international creation of money.
Countries that can create their own money do not need them but periphery
countries do. The rich countries should therefore lend their allocations to the
nations in need.
Recipient countries would pay the IMF interest at a very low rate,
equivalent to the composite average treasury bill rate of all convertible
currencies. They would have free use of their own allocations but would be
supervised in how the borrowed allocations were used to ensure they were well
In addition to the one-time increase in the IMF’s
resources, there ought to be a big annual issue of SDRs, of say $250bn, as long
as the recession lasts. It is too late to use the April 2 G20 meeting to agree
this, but if it were raised by President Barack Obama and endorsed by others,
this would be sufficient to give heart to the markets and turn the meeting into
a resounding success.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.