4/1/09

The G-20 Summit represents a tremendous challenge for the Obama administration. A president on his first major venture into international diplomacy faces a divided international community and anger over the economic crisis that stemmed from the poor economic management of the Bush administration.  As a result, while President Obama is immensely popular abroad, he enters the arena with diminished American prestige and credibility.  The G-20 Summit will not resolve the central disagreement between the two largest economies, the U.S. and the European Union, over additional stimulus spending.  But, largely due to the Obama administration’s creativity and initiative, the Summit will manage that tension productively and rack up several important results, such as:  reforming and bolstering the IMF to limit the further spread of the crisis (which was led by the U.S.); a re-commitment to open trade, and a ground-breaking agreement on an international framework to regulate global finance. While European leaders have resisted calls for additional stimulus spending, there have been commitments to ensure that more troubled EU countries avoid default. This falls short of what the U.S. was seeking, but does imply a commitment to act if the crisis worsens. The US leaves London well-placed to lead continued global collaboration over the course of the year and manage disagreement productively. There would be no need for international diplomatic summits if everyone was already in agreement.

Obama faces steep challenges at G-20 conference, stemming from the disastrous economic and diplomatic policies of the Bush administration.  Heading into the G-20 today, President Obama must overcome the steep economic and diplomatic hurdles left to him by the Bush administration.  The International Herald Tribune explains, “The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown... The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.”  James Goldgeier at the Council on Foreign Relations explains that “This is a very difficult situation, because the U.S. is still the global leader, and problems aren't going to be solved without the U.S. leading the efforts to solve them, but other countries are not in the mood to do what the United States says.” [AP, 12/01/08.  IHT, 9/20/08. NY Times, 3/31/09. Wall Street Journal, 4/1/09. Donald Rumsfeld, 1/23/03. NY Times, 11/16/03. Foreign Affairs, July/August 2008. Washington Post, 7/2/05]

Despite challenges, the Summit is expected to achieve important agreements on a number of areas. Former IMF Chief Economist Simon Johnson calls US leadership going into London “a creative surprise” that importantly enhances the capabilities of international financial institutions to stop the crisis from spreading, as well as sets a precedent for cooperation on the toughest issues.  As the Washington Post reports, “The one-day London summit is expected to end Thursday with leaders from many of the world's biggest economies agreeing on new regulations for banks and hedge funds, a large increase in funding for the IMF and a pledge to fight protectionism... They are also expected to tread lightly on U.S. calls -- opposed by many in Europe -- to boost government spending worldwide to combat the global economic crisis. U.S. officials indicated last week that they would not press nations to adhere to specific spending targets.” [Simon Johnson, 3/31/09. Washington Post, 3/31/09]

•G20 Leaders agree to commit more funding to the IMF to help prevent crisis from deepening and to assist developing world.  Recognizing the importance of global international financial institutions and the need for a lender of last resort in times of crisis, the G-20 countries have agreed to enhance the capabilities of the International Monetary Fund to combat the crisis.  The Wall Street Journal writes, “The IMF is about to gain more power. Thursday’s summit of leaders of the Group of 20 industrialized and developing nations is poised to elevate the IMF by promising to pump more than $250 billion into the fund, and asking it to issue ‘early warnings’ about countries in peril.” This is significant as C. Fred Bergsten says, “Developing countries now make up roughly half the global economy. Hence their ability to recover will have a major impact on our own prospects and those of the entire world... Any effective global recovery strategy must therefore accord a central role to this group of nations. In addition to rapidly shrinking markets for their exports, they have experienced a huge cutback in private capital inflows. They need offsetting support from public investment, which only the International Monetary Fund can provide in sizable amounts on short notice.” [Wall Street Journal, 3/31/09. C. Fred Bergsten, 3/18/09]

•G20 Leaders agree on expanded regulation. While the debate going into the summit was often described as Americans wanting more stimulus and Europeans wanting more regulation, the G20 leaders in fact have come to a general agreement on the issue of regulation. “David Sanger of the New York Times writes that “For the first time, there will be a broad agreement about the need to regulate hedge funds and to force tax havens in places like the Caribbean and Switzerland to meet some global standards. Mr. Obama will arrive pledging an overhaul of the United States’ patchwork of regulations, which left institutions like A.I.G. without adequate supervision.” The Washington Post writes that, “The global leaders this week are also set to endorse the expansion of the Financial Stability Forum in Switzerland, which will emerge with a new name -- the Financial Stability Board -- and a vastly expanded mission. The organization currently brings together regulators, central bankers and finance ministers from a cluster of wealthy nations. The new membership will include 10 emerging markets including Argentina, Brazil, South Africa and China. The institution, which previously served as a little-used forum for exchanging ideas, will draft the details to enhance global standards for financial institutions, including benchmarks for executive pay and how much risk they can take on.” [NY Times, 3/31/09. Reuters, 3/31/09]

•G-20 leaders re-commit to keeping markets open. Mike Froman, deputy national security adviser for international economic affairs, told the  Wall Street Journal, "I think all the G-20 (nations) are seized with the importance of avoiding steps that would further reduce or distort trade... My sense is there will be a reaffirmation and perhaps an extension of that commitment, and perhaps a bolstering of the role of the (World Trade Organization) in monitoring the implementation of that commitment," he added.  A leaked communiqué from the G20 to the Financial Times confirms this agreement.  It says, “we reaffirm the commitment made in Washington not to raise new barriers to investment or to trade in goods and services, including within existing WTO limits, not to impose new trade restrictions, and not to create new subsidies to exports.” [Wall Street Journal, 3/31/09.  Financial Times, 3/29/09]

•G20 Leaders have different views on stimulus but agree on principle of fiscal stimulus.  Differences have emerged between the U.S. and Europe over the need for immediate increases in fiscal spending. However, there is broader agreement between the U.S. and Europe that fiscal policy is an important tool in combating the global economic crisis. As Bloomberg reports, Germany is “injecting 82 billion euros ($110 billion) into the economy, the biggest stimulus package in Europe... Merkel says the aid is necessary for the world’s No. 1 exporter to survive the economic crisis.” Furthermore, Germany has pledged to help stabilize struggling economies in Europe, “German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out cash-strapped members of the 16-nation bloc, going further than his counterparts in saying euro states can’t be allowed to fail. ‘Some countries are slowly getting into difficulties with their payments... The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty.’” [Bloomberg, 3/26/09. AFP, 4/01/09. Bloomberg, 2/17/09]

Further global action will be needed to address global crisis and London G-20 is a starting point - not an end point.  The London G-20 summit follows on the first G-20 summit held in Washington DC last November. No matter what is or is not agreed to at the G-20 summit in London, it is important that this be viewed as part of a continuing process of building global action to address the global economic crisis. Thomas Finger, former Director of the National Intelligence Council explained that “London is not going to resolve everything.  I think a part of the outcome of this… is that we’ve made a good start and we’re going to meet again.” The G-8 will meet in Italy in early July and another G-20 summit is scheduled for the end of the year. It is important that the G-20 forum be strengthened and permanently institutionalized, as the Center for American Progress argues in a new report, that G-20 members should “agree to permanently establish a G-20 leaders forum to ensure that whatever is agreed upon at the London summit is implemented effectively to deal with the world’s immediate crises. The members of this forum would initially be the current leaders of the G-20 countries, but the forum would have a built-in mechanism to allow for flexibility in the future... The creation of a permanent, yet evolving G-20 leadership forum and secretariat would be a positive step for global economic governance.” [Democracy Arsenal, 4/1/09. Center for American Progress, 3/31/09]

What We’re Reading

The G-20 begins tonight.  President Obama and British Prime Minister Gordon Brown call for tough moves against the global financial crisis.  G-20 leaders received an OECD report that global trade is in freefall.  Almost 4,000 protestors gathered in London’s financial district, and various groups tried to storm the Bank of Scotland.

President Obama met with Russian President Dmitry Medvedev.  They began negotiations on a new nuclear arms treaty and President Obama accepted an invitation to visit Moscow in July.

At his handover ceremony, Israel’s new far-right foreign minister, Avigdor Lieberman, said that Israel is not bound by the 2007 Annapolis agreement to reach a peace deal with the Palestinians.  Outgoing foreign minister Tzipi Livni interrupted him while other diplomats “shift[ed] uncomfortably.”  Palestinian President Mahmoud Abbas says new Israeli Prime Minister Benjamin Netanyahu does not believe in peace.

The Obama administration had its first face-to-face contact with Iran as Presidential Envoy Richard Holbrooke met with an Iranian official.

Reversing a Bush administration policy, the U.S. will now seek a seat on the U.N. Human Rights Council.

A federal judge ordered the release of a Guantanamo detainee who provided incriminating information against other inmates.  Chinese Guantanamo detainees pose a special challenge to the Obama administration.  

China is increasingly confident in its dealings on the world stage.

Secretary of State Clinton said that the U.S. will reform its civilian foreign aid program. Meanwhile, Defense Secretary Robert Gates called Senate Budget Committee Chair Kent Conrad to ask that he rescind a proposed cut of $4 billion to Obama’s proposed foreign assistance budget.  

The New York Times looks at the “new boldness” of Iraqi militants.  Fighting continues in Diyala province.  The Army investigates how unfit soldiers were allegedly sent to Iraq.

Mexico’s tough anti-gun laws are undermined by readily-available illegal arms from the U.S.

North Korea threatens to shoot down U.S. spy planes monitoring its rocket launch.

Japan pays jobless foreigners to go home, trying to combat rising unemployment.

Commentary of the Day

French President Nicolas Sarkozy lays out priorities and requirements for the G-20.

Martin Wolf thinks that G-20 leaders will fail to properly address the economic crisis.  The Financial Times reminds the G-20 not to forget the poor and the hungry, sure to increase in number this year.

CIA veteran Robert Baer looks at how the Obama administration can avoid a quagmire in Afghanistan.

Bernard Lewis pushes for reforming the Israeli election system.

NSN board member Michael Cohen fits Obama’s position on foreign policy into a Democratic tradition.

David Shorr outlines how global cooperation is essential for solving the financial crisis.