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The G20’s Role Reversals

Posted by hkarner - 7. Juli 2017

JUL 7, 2017 Project Syndicate

Since the Group of Twenty (G20) was founded in 1999, the United States and China have generally managed to restore or instill confidence in the international order, even when other members were mired in crisis. And in the ensuing years, both countries have maintained stable growth and weathered economic storms better than most.

G20 summits thus became occasions for the US and China to flex their muscles as they helped others, not least the members of the eurozone. But, at this year’s G20 summit in Hamburg, Germany, the tables seem to have turned. The US under President Donald Trump has no appetite – or, it appears, the ability – for global leadership, and China is confronting mounting threats to growth and stability, whereas the European Union is now growing faster than at any time since 2008. And recent elections in the Netherlands, the United Kingdom, and France seem to have closed the door on the threat of populism in Europe, at least for now.

This has certainly boosted European self-confidence, reflected in the EU’s agreement with Japan on a free-trade agreement and the French energy giant Total’s first big investment in Iran since the nuclear accord with that country was agreed in 2015. And, though both actions are sure to rankle Trump, he is presiding over the most unpopular and shambolic US administration in living memory. And, not surprisingly, his near-daily displays of puerile belligerence, have carried over into diplomacy. At the first international conference that he attended – the G7 summit in Taormina, Sicily, in May – Trump shoved another head of state out of the way to get to the front of a group photo, and said of the Germans that they were “very bad.”

China has been actively trying to take advantage of America’s declining prestige internationally, and has made headway, particularly in promoting itself as a defender of multilateralism and the Paris climate agreement, from which Trump has withdrawn the US. But these efforts are hobbled by China economic worries, particularly the need to address its ongoing buildup of corporate and local government debt. And its behavior on the world stage, though certainly less boorish than Trump’s, has left other G20 member states wondering how much it can be trusted as a global leader.

Project Syndicate commentators, some of whom are in Hamburg this week, have followed these developments closely and sagaciously, providing compelling insights into the many issues on the G20’s agenda. Whether anything substantive will emerge from the summit is anyone’s guess. But a better understanding of the political, economic, and social issues on world leaders’ minds makes clear what is at stake with respect not only to specific issues, but also to the future of global governance.

Summiting 2017

For Harvard’s Dani Rodrik, this year’s summit promises to “be among the more interesting in recent years,” in large part because “Trump, who treats multilateralism and international cooperation with cherished disdain, will be attending for the first time.” In particular, predicts the New School’s Nina Khrushcheva, all eyes will be on Trump’s first meeting with “his Russian counterpart and strongman-hero Vladimir Putin.” That sideshow will no doubt go a long way to making this Hamburg summit what Princeton historian Harold James anticipates will be the G20’s “tensest meeting ever.” But, Khrushcheva suggests, with Putin’s suspected meddling in the US presidential election having “undermined Trump’s presidency,” and “Trump’s chaotic behavior” damaging “Putin’s position, already undermined by his own economic mismanagement,” both men could soon “be regretting that they ever sought each other out.”

But, beyond Trump and Putin, domestic political developments in core G20 countries over the past year have challenged the group’s very raison d’être. In addition to the more obvious sources of uncertainty – namely, Trump’s election and the UK’s decision to leave the European Union – Khrushcheva underscores the fact that “once-great political parties” are collapsing worldwide, from the US, the UK, and France, to India and South Africa. And while this is not necessarily a change for the worse, it is clearly fueling doubts about what the future may hold.

So, too, is “the threat of rising trade protectionism,” which Rodrik expects to be “on all G20 leaders’ minds in Hamburg (except for Trump’s of course).” World leaders will also have to contend with numerous brewing global risks. Among these, notes New York University economist Nouriel Roubini, is the possibility of another stall in global growth and any number of geopolitical crises, such as a “military confrontation between the US and North Korea,” or “a trade war between the US and China.”

Moreover, as Yale’s Stephen Roach points out, “Notwithstanding a modest firming of global economic growth, inflation in the advanced economies is expected to average slightly less than 2% in 2017-2018.” But if advanced economies continue to fall short of their inflation targets, Roubini warns, interest rates will likely remain low, and central banks will “not have enough room to maneuver effectively” when the next downturn comes.

And even if these macroeconomic risks are accounted for, a host of other issues demand attention. “In the last six months alone,” writes Syed Munir Khasru of the Institute for Policy, Advocacy, and Governance, “more than 2,000 lives have been lost in the Mediterranean; over the last weekend in June, 12,600 migrants arrived in Italy by sea.” Moreover, as Teresa Ribera of the Institute for Sustainable Development and International Relations points out, “Merkel and other G20 leaders,” will have “to overcome US (and Saudi) resistance and stay the course on climate action,” especially given Trump’s withdrawal of the US from the Paris climate accord. And, more broadly, Former Danish Prime Minister and Save the Children CEO Helle Thorning-Schmidt maintains that today’s single biggest issue is crisis-level inequality, which started to accelerate “sharply after the global financial meltdown that the G20 helped stem.”

As James reminds us, the summit process followed by the G20 dates back to the 1970s, when it was designed to reduce global economic risks through coordinated policymaking and shared “mechanisms of globalization.” But those very mechanisms, and global leadership itself, are “now in question.” This troubling fact, James notes, “has, inevitably, led China and Europe – specifically, Germany – to see themselves as the new defenders of the global order.” Accordingly, German Chancellor Angela Merkel spent the lead-up to the Hamburg summit encouraging European leaders to show a united front in support of liberal values and the post-war international order. Indeed, “judging by Trump’s performance at the recent G7 summit in Sicily,” notes Erik Berglöf of the London School of Economics and Political Science, European leaders should expect him to “continue his attack on globalization” in Hamburg.

Liberal Democrats Need Not Apply

Before arriving in Hamburg, Trump stopped in Poland, where he received a gushing welcome from the right-wing Law and Justice Party (PiS) government. For Sławomir Sierakowski of the Institute for Advanced Study in Warsaw, Trump’s decision to visit Poland was “no accident.” Trump has put off visiting the UK, “where he would have drawn large protests”; but, in Poland, he was welcomed by supporters whom the PiS had bussed in from its 300 parliamentary districts. This Potemkin Roman triumph, Sierakowski observes, was meant to show that Trump and PiS Chairman Jarosław Kaczyński “are beloved leaders with many allies, and not isolated, deeply unpopular figures.”

Of course, Trump and Kaczyński weren’t fooling anyone but their diehard supporters. Guy Verhofstadt, a former Belgian prime minister who leads the Alliance of Liberals and Democrats for Europe in the European Parliament, cites a new Pew Research Center study showing that Trump enjoys little confidence “in most countries,” and that he “has already done serious damage to the United States’ reputation.” But Trump’s goal is not to make all of Europe fall in love with him. Rather, his goal in cozying up to Europe’s soi disant “illiberal” leaders is “to deepen the EU’s internal divisions, by playing its eastern flank against its western members.”

In this regard, Trump has much in common with Putin, who “has long sought to disrupt the EU by destabilizing countries on its eastern periphery,” Verhofstadt writes. And in recent years, notes Harvard University’s Joseph Nye, “Russia’s attacks on Georgia and Ukraine have reminded Europeans of the dangers they face from their large neighbor.”

Putin’s adventurism, it is often assumed, may be a ruse to distract Russians from the parlous state of their economy. Indeed, as Harvard University’s Kenneth Rogoff explains, when Putin meets Trump in Hamburg, “he will hardly be coming from a position of economic strength.” Russia suffered “a decline in output in 2015 and 2016 comparable to what the United States experienced during its 2008-2009 financial crisis,” Rogoff notes, “with the contraction in GDP totaling about 4%.”

Russia desperately needs reform. Yet that isn’t likely to happen anytime soon, because, as Anders Åslund of the Atlantic Council points out, Putin “has essentially nationalized Russia’s elites,” by appointing not just his cronies, but also their children, to top positions. And in Russia’s next presidential election, in 2018, Rogoff predicts that Putin “will easily be able to engineer another landslide victory” for himself. One might add that this could also enable him to continue trying to engineer electoral outcomes in the West, too.

Putting Europe Back Together Again

Still, even with Russia casting a shadow over Europe, the EU may finally be coming out of its long funk. Europeans’ renewed hope can be summed up in one word: “Mercron.” The budding “partnership between [French President Emmanuel] Macron and German Chancellor Angela Merkel,” reports Mark Leonard of the European Council on Foreign Relations, “has European policymakers talking excitedly about a reinvention of the eurozone.” For Leonard, the Merkel-Macron alliance will likely entail a rebalancing toward France, which, as Dominique Moisi of the Institut Montaigne in Paris explains, is probably just what Europe needs. Europe’s biggest problem in recent years “has not been ‘too much Germany,’” Moisi argues, but rather “too little France.” Now that France’s star is rising, so, too, might Europe’s.

And as other stars have fallen, Merkel and Macron’s pro-European agenda has gained credibility. For example, before the Brexit referendum, former German Foreign Minister Joschka Fischer reminds us, the UK “had a very strong hand to play within the EU, and thus on the world stage.” Now, British Prime Minister Theresa May has lost her parliamentary majority, and is presiding over “a severely weakened government in a state of crisis.” With or without schadenfreude, the UK’s decision to quit the EU has become a reference point for Europe’s future, such that Fischer expects future historians to “look back at 2016 and 2017 with great interest” – if not morbid curiosity. In the meantime, notes Moisi, France has already started “influencing the direction of Europe far more than Britain.”

Similarly, the hot air emanating from America (and mostly onto Twitter) may be filling Merkel and Macron’s sails. As Nye sees it, Trump’s “very unpopularity has helped to reawaken European values.” And Macron, at least so far, has cannily used Trump as a foil to put those values on display. Trump made no secret of his “hope that [Macron] would never make it to the Élysée Palace,” notes Zaki Laïdi of Sciences Po. And yet Macron has responded by inviting Trump to “attend this year’s Bastille Day celebrations,” thus setting “the stage for a new and ambitious French foreign policy.” By taking the higher road, Macron is aiming to “restore France’s central position on the world stage, while remaining firmly committed to Europe.”

Moreover, the positive effects that Trump has unwittingly had on European solidarity extend beyond political gestures. For example, Nye reports that, “Efforts to build a common European defense have begun,” because Trump’s presidency has brought “the security issue” in Europe “to the foreground” in policymaking circles. At the G7 in May, Trump again criticized other NATO countries for not spending enough on defense, implying that America’s security guarantee now comes with strings attached. Although he used his address in Warsaw finally to affirm the principle of mutual defense under Article 5 of the North Atlantic Treaty, Europeans have no choice but to presume the worst. Trump is hardly a reliable interlocutor; as Sierakowski points out, he’ll say anything to “remove suspicion” that he or his advisers have ties to Russia.

Euro Woes

In the absence of a consensus on other issues (not least economic policy), a common defense structure has been touted as a goal on which all EU member states can agree. But as former Greek Finance Minister Yanis Varoufakis warns, “the idea of Europe” will not have been “rehabilitated” until European leaders resolve the longstanding euro crisis, which is still manifesting in the realms of “public debt, banking, investment, and social deprivation.” Similarly, Rogoff advises European policymakers not to let a cyclical recovery render them complacent. “The status quo,” he contends, “is not sustainable; eventually, there must be either significantly greater fiscal integration or a chaotic break-up.”

Macron, for his part, hopes to turn the eurozone into what Varoufakis describes as “a state-like entity – a federation-lite.” But Varoufakis doubts that Germany would actually agree to France’s proposals for “a common budget, a common finance ministry, and a eurozone parliament.” And “in the unlikely event that Germany gives federation-lite the go-ahead,” he writes, “any change to the functioning of the eurozone would, undoubtedly, devour large portions of the reformers’ political capital.” If they fall short of actually creating a “proper federation,” Varoufakis fears, “the euro’s dismantling will become inevitable, will cost more, and will leave Europe in even greater shambles.”

Even if European policymakers can agree on a roadmap for shoring up the eurozone, they will also have to address numerous, seemingly intractable political and social issues. Greece is certainly one example, and Mohamed El-Erian, the Chief Economic Adviser at Allianz, laments that not enough has been done to set the country “on a realistic path of medium-term growth and financial viability.” The main reason, he surmises, is not economic, but political: European policymakers are still too worried about the “consequences of granting Greece debt relief, especially ahead of Germany’s federal election in September.”

For MIT’s Simon Johnson, Europe’s demographics pose another problem. “An aging population,” he observes, “means more retirees – expecting publicly provided pensions – relative to the number of economically active people.” And, more immediately, “imbalances within the eurozone” threaten to undermine the current recovery. While Germany enjoys “1.5-1.6% growth, near-full employment, and a large current-account surplus,” Johnson notes, Spain still has “disturbingly” high unemployment, and Italy remains in an economic rut.

Indeed, the German trade surplus may be the one issue around which even Trump cannot unite Europeans. Christoph Schmidt of the German Council of Economic Experts recognizes that “Germany’s economy could benefit from policy changes that would also reduce the current-account surplus.” But he worries that debates about Germany’s external balance have missed the point, and fed into populist myths.

Schmidt carefully demonstrates that, contrary to Trump’s nonsensical claims about currency manipulation, Germany’s trade surplus is a result of many long- and short-term economic factors that have nothing to do with deficient domestic demand – and that cannot simply be willed away. Ultimately, Schmidt is confident that a reasonable compromise – solidly grounded in economic facts – can be made to boost “investment inside Germany” and correct existing imbalances in the eurozone.

China’s Credibility Problem

Germany is pursuing its options outside of Europe as well, by strengthening ties to another major exporter: China. As James notes, “China and Germany are increasingly aligned on many key issues,” such as fighting climate change and opposing trade protectionism. But, despite China’s recent gestures in defense of multilateralism, many Project Syndicate commentators question whether it is really capable of global leadership.

According to Chris Patten, the last British governor of Hong Kong, China’s behavior toward that city should be viewed as a litmus test of Chinese officials’ credibility. “If China’s leaders break their word in Hong Kong,” he asks, “how can we trust them in other areas?” As Patten points out, “The shift in sovereignty from Britain to China was based on” a guarantee from China that “Hong Kong’s autonomy and way of life would be safeguarded for 50 years, or until 2047.” But after the handover, China “rather quickly started dismantling the arrangements for ensuring democratic accountability,” and tightened its “grip on Hong Kong.”

For Minxin Pei of Claremont McKenna College, this is not what “Deng Xiaoping, the architect of the ‘one country, two systems’ model,” would have envisioned for the handover’s 20th anniversary. Rather, Deng would have expected to see his successors “showcasing their credibility and governing capacity, finally quieting the chorus of naysayers who had doubted the Chinese Communist Party (CCP) and the sincerity of its promises to Hong Kong.”

Instead, Pei observes, “scenes that would have been unthinkable in Hong Kong in 1997 – mass anti-China demonstrations, the election of anti-CCP radicals to the city’s legislature, open calls for independence – have become routine.” But this popular discontent, China scholar Sin-ming Shaw explains, reflects Hong Kong citizens’ “growing frustration, not only with China’s leaders, but also with their own.”

Of course, in some ways, these are one and the same issue. In just 20 years, Shaw recounts, Hong Kong has twice been led by CCP loyalists who were succeeded by their own deputies after they proved too “tone-deaf” or “divisive.” This legacy of misrule has left a “power vacuum,” and “widened the city’s political, economic, and generational fault lines.” So far, China has tried to paper over these divides through political repression. But if “China and its local proxies continue to ignore what protesters are really shouting about,” Shaw warns, “incompetent loyalists at the helm will be the least of their worries.”

China’s current economic woes will provide another test of its leadership. Its “mounting debt problem,” writes Yu Yonding of the Chinese Academy of Social Sciences, “recently moved into the spotlight when Moody’s downgraded the country’s sovereign rating.” That downgrade should have surprised no one. Jun Zhang of Fudan University places much of the blame on China’s poorly regulated shadow banking sector, in which the volume of credits has nearly tripled “relative to 2011, to CN¥65 trillion.” Moreover, “shadow banks’ share of total credit soared from 10% to 33%” since 2006. Not surprising, according to Jun, “this fueled rising risk across China’s financial sector, while intensifying pressure on the real economy.”

Yu, for his part, acknowledges that “China’s debts – especially its corporate debts – are a serious problem, and must be curbed.” But he would caution Chinese leaders against overreacting. China urgently needs to prevent “overcapacity-driven deflation,” he explains; and any effort to do that “could be undermined by rapid deleveraging.”

Yu credits China for managing to “juggle these two imperatives,” but fears that it is only a matter of time before China drops a ball. Roubini agrees. If it doesn’t “jumpstart structural reforms and contain its debt explosion by next year,” he warns, “the risk of a hard landing will return,” and today’s economic expansion could “turn into another global slowdown – if not an outright stall.”

Neighborhood Bully

But if China wants to gain the rest of the G20’s trust, it will have to prove that it can behave responsibly in its own region. As it currently stands, “its large infrastructure initiative, One Belt, One Road,” James believes, “will create new dependency problems and exacerbate existing rivalries in Asia.” And China has hardly helped its cause by stepping up its territorial revisionism in the South China Sea and on its border with India.

According to Brahma Chellaney of the Center for Policy Research in New Delhi, China has recently “become more assertive” in its decades-long “bulletless war for territory” with India. “Bite by kilometer-size bite,” Chellaney reports, “China is eating away at India’s Himalayan borderlands.” And in just the past decade, India has “lost nearly 2,000 square kilometers to [People’s Liberation Army] encroachments.”

But Chellaney is quick to point out that India itself has been a “meek enabler” of Chinese incursions. Rather than stating unequivocally that violating sovereign borders is unacceptable, Indian leaders have occasionally “seemed to condone China’s actions,” while issuing platitudes about the need “for border peace and tranquility” between the two regional powers.

In Chellaney’s view, the lesson is clear: “To halt further encroachments, India will need to bare its own teeth.” The same might well be said of G20 leaders as they confront Trump this weekend. For an American president who seems to have a pathological compulsion to transgress accepted norms and disparage international cooperation, firm diplomatic pushback may be just what the doctor ordered.

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