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The G20 and the London Summit: a global turning point

Rt. Hon. Lord Mandelson,  First Secretary of State, Secretary of State for Business, Innovation & Skills, Lord President of the Council
Council for Foreign Relations, New York,  17 February 2009

Let me offer you some observations for 10, 15 minutes and then engage with you.

I think it says something about what's happening in the global economy and the changing political landscape of the global economy and it says something about the G-7 finance ministers at the weekend that the main outcome of that meeting seems to have been that whereas that sort of previous high command of the G-7 would have been tracked with great anticipation, its main outcome seemed to be that it was simply a staging post for the next meeting of the new steering committee of the global economy being formed with the G-20. And I think that says quite a lot, that we are moving from an era of G-7 to an era of G-20, and that we have to wake up and take notice of this change, which is, in my view, quite a profound one and to take greater notice of what others are saying.

Two weeks ago we had in London Premier Wen Jiabao, who came with a group of very senior ministers. I was struck by the premier's tough, confident line on the flaw in Western banking system and regulatory systems, not only in London but during his European tour.

Our first reaction to this, I think, in the United States and in the European Union, when we have such sort of strictures taken to us, is probably to be defensive, I think not least because China's own economic model is hardly flawless.

But once we've got over our initial sort of defensive reaction to these strictures, I think, much of the criticism is fair enough, and more importantly, the debate it's engaging is a reflection of a fundamental shift in the balance of economic weight in the global economy.

And this is a new reality, and while its first test will be at the London meeting of the G-20 on the 2nd of April, following the previous November meeting in Washington, the truth is that Copenhagen and the climate change negotiations will follow on pretty quickly.

So I think we have just to bear this in mind: that insofar as we can make the G-20's role in relation to the global economy a success, that will have a positive knock-on effect on Copenhagen and the climate change negotiations, and of course, conversely, if we don't make a success of the G-20 in April, that too is going to have a negative knock-on effect on everything else that we're taking on in trying to navigate our way through the challenges that our world is facing.

So what is the London meeting going to be about? Well, London's big problem, London's big challenge, what we are confronted with, is, in my opinion, nothing less than a risk -- a sharp risk of dismantling or at least damaging the global economic machine: the risk of deglobalization.

We have a crisis, as we all know, in the global real economy. It started in the financial markets, as we know too. And we also know that it's turning into something much worse and that the sort of bottom is -- the floor is being sort of taken out of global growth. Trade is set to go -- move into reverse in the global economy for the first time since 1982.

Now, after, therefore, a 20-year bull market, the core engines of growth, trade and international investment are suddenly becoming very vulnerable. A risk, in my view, involved in all this is not really a sort of a Smoot-Hawley style tariff wall of the sort that we have known generations ago. The WTO constrains states on tariffs.

I think the greater risk and the greater threat of protectionism to the global economy, to trade and to investment is a rather more insidious one. It comes in the form of a competitive subsidy wall or a -- or regulatory protectionism, like "Buy America" -- or buy British or buy whatever it is -- or a retreat into domestic lending by banks that have been operating internationally, you know, directly or through subsidiaries. It's a sort of -- you know, a retreat into the sort of familiar confines of your home market, a retreat from the internationalism that has characterized international finance to date.

And this, in my view, is a pretty toxic combination of economic short-termism, economic nationalism and retrenchment, which in that sort of lethal combination has the potential, in my view, to do an enormous amount of lasting damage to global economic growth and our ability to sustain living standards at home, but also to generate growth and rising prosperity elsewhere in the world.

Now, this is not just like taking your foot off the gas, in other words, as far as growth is concerned. It's actually attacking the very engine of global growth. And I think the lesson of the 1930s is that protectionism might seem to treat the symptoms of the downturn, but it is a poison as far as global recovery is concerned, because it puts a structural check on future economic growth.

So I think the first challenge therefore for the London summit is to address this crisis in growth and demand and, in doing so, preserve the openness of the global economy. And therefore, I think that there are three priorities with this view in mind.

First, the G-20 should agree that fiscal stimuli, the sort of national recovery plans mounted in each of our countries, need to reinforce each other. There has to be an international sense and dimension to what we are doing, each of us, domestically. In the classic Keynesian model, a closed national economy stimulates its own falling demand, but our economies are now dependent on each other's demand. You know, we are not closed and insulated in the way and to the extent that we were generations ago. For example, you know, U.K. car industry sales -- something currently sort of close to my heart, as to any politician's heart who deals with the immediate repercussions of collapsing demand -- our sales won't recover unless European demand, and indeed Asian demand, for cars rises.

To be both fair and effective, therefore, stimuli have to reflect our interconnectedness in the global economy. In many respects, therefore, what we are doing is priming the global pump. And that is the dimension, that is the sort of different level, if you like, that we as politicians, as policymakers, need to climb up to, in order to understand both the importance of what we're doing, but also the greater effectiveness of our measures if we can multiply and reinforce what we're doing, each of us in our own economies, by means of international coordination amongst many economies. And that's why coordination, both on the principle of what we're doing and its timing, are very important.

Secondly, the G-20 should agree on the need to make sure that the stimuli take the right form and push in the right direction, that they reach into activities and sectors that will do most to strengthen our economies in the longer term -- in other words, to build tomorrow today in the measures that we are selecting to form part of our stimulus programs. For example, using fiscal stimuli to draw down on vital infrastructure investment and the transition to the creation of a low-carbon economy, as two examples; but there are others.

Job creation and job preservation are vital, but jobs need to be sustainable. They need to form part of bridges to our economic future, and not simply the ad hoc and makeshift.

There has to be, in other words, a sort of economic-industrial rationale for what we're doing today in order to strengthen our performance and productivity in the longer term. And I think in the main, the U.K. and the U.S. are both doing this intelligently.

And thirdly, I think the G-20 should commit to keeping the multilateral trading system open and cross-border investment flowing. It -- it's -- it may not be the conventional way of looking at a sort of demand stimulus, but I would argue that a world trade deal meets many of the criteria of an effective demand stimulus. I would actually call the Doha Round not a trade deal so much as another stimulus package for the world economy, and get it done, incidentally, in 2009.

So if you take -- bring all these things together, what I think we've got to think of our approach as is building a new roof for the global economy and not simply putting a patch on the old one. And I think that's what the London Summit has got to do and got to be, more than a patch for the roof but, you know, replacing the roof.

And I -- the reason I say this is because, you know, (I also ?) having just spent four years as Europe's trade commissioner, you know, perambulating my way around, you know, the world, in and out of all the emerging economies, as well as what my Indian counterpart used to call the submerging economies as well -- nice guy -- the fact is that the global economy has gotten miles ahead of effective economic governance in the world, both in terms of its approach to finance and its reflection of the basic balance of power in the global economy.

Again, three priorities, if I may suggest. One, financial markets are regional and they're global. And therefore, the warning systems that we put in place and employ in supervising, policing those financial markets, they need to be something other than and more than national as well.

We need to rethink the remit of international financial institutions. We need a strengthening of the IMF and the Financial Stability Forum in giving them a strong early warning role. And as well as reporting on national economic performance, the IMF needs to be assessing the levels of risk, too, in international financial markets, and flows between countries and global interaction with monetary and currency policy.

All this needs to be done in order to speak to and reflect the transformed global economy and international markets, which underpin economic activity and growth in the world today, but which, institutionally, we simply haven't kept up with and haven't addressed adequately for the times in which we live.

And I would also favour strengthening the ability of the World Bank, too, to lend to developing countries. But that's a separate albeit related issue.

Secondly, we need to rethink some of the basic frameworks for finance and banking at a global level, including Basel II, making capital allowances counter-cyclical so that they cool off lending in upturns and support lending in downturns, which they don't do adequately at the moment; assessing the rules about what liabilities can be kept off balance sheet; reform of the credit-ratings agencies, having rather sadly let us down; but also, I have to say, a cultural change in the financial-services industry, a different approach to risk and to reward.

And thirdly, we must have China, India and the other emerging economies around all these tables, engaging with us in these discussions and these decisions, too.

You know, the basic Atlantic management model of the Bretton Woods system is simply no longer fit for the purpose that we need, which brings me to my last point, which is about coupling and decoupling.

I think last year -- even last year, you know, as I went around and talked to my counterparts in different countries and emerging economies, there was still a sort of -- a sort of, I don't know, wishful thinking, complacency, a sense of, "Well, we've taken off, we're leaving you behind," a sort of decoupling of the large, fast- growing economies from, you know, the old economies. I don't find people are talking so readily about decoupling now.

The only reason global growth is barely the right side of zero is because of demand from the emerging world. So they're not talking about decoupling in the way that they were. As Chinese export growth is slowing, the consequent dent in its prosperity meant that its imports are falling more than twice as fast. So we stand and fall together. There is no such thing as decoupling and this crisis is bringing this home to us.

So I think in the next year, as a new U.S. administration sets about establishing its China policy and its foreign economic policy, I would make a very strong plea to the administration for a constructive approach to reach out internationally to think not just of the next immediate sort of vote and challenge on this stimulus package or that provision or this part of the, you know, eight -- is it 800 pages, this stimulus package? What did you say?

MR. STALEY (Presider): It's over 1,000.

SEC. MANDELSON: A thousand pages? Well, that's sort of pretty absorbing. (Laughter) But I would just say that, you know, beyond that thousand pages, you know, there's a world out there which wants to and needs to engage with the United States in seeing how we can fix and replace the roof together.

And I think that what we have to make sure of is that the London Summit is a real turning point in our understanding, in our focus on these issues; one of those moments when an old order gives way to the new sort of pragmatically-governed order, you know, with a real sense of new purpose. And the U.S. will be absolutely vital to the success of that meeting, and the U.K. will be very committed indeed to making sure that we get as great a successful outcome from that meeting as we possibly can.

Thanks. (Applause)