G-20 Minus Or G-7 Plus? – Analysis

By Heribert Dieter

This year’s meeting of the G-20 countries in Rome reflects the difficulties of organising international cooperation in an era of geopolitical conflict. In the past, those meetings were grand events, reflecting the need for enhanced cooperation in a globalising world. Today, the absence of the Chinese leader Xi Jinping clearly shows that the interest in broad international cooperation is declining and that the most ambitious goal in an age of diminishing interest in deeper global integration is supranational cooperation of like-minded countries.

The absence of Xi Jinping at the G20 meeting in Rome is not a big surprise, but important nevertheless. General Secretary Xi has altered his country’s policies quite radically. He insists on minimum exchange with the rest of the world: More self-sufficiency, less globalisation. Of course, there will be economic costs for China. With less trade, growth will probably be lower. But for Xi, one goal retains priority: He wants to ensure that the Communist Party’s rule is safeguarded. Today, inward-looking policies seem to ensure that.

The COVID-19 pandemic has enabled Xi to push that approach vigorously. Flights to and from China have declined by 98 percent. Xi’s unwillingness to travel to Rome sends a clear signal to his fellow citizens: It is much safer to stay at home. China is on a trajectory of self-imposed decoupling from the rest of the world. Cooperation in multilateral fora becomes less important.

For different reasons, Vladimir Putin has also decided to stay at home. G20 meetings have never been easy for him. In 2014, Tony Abbott, then Prime Minister of Australia, had promised to “shirt-front” Putin over the annexation of Crimea. Putin has been a second-class participant of G20 Summits ever since. His interest in getting lectured on energy issues may have recently decreased. Since the rest of the world, with the exception of China, shows little interest in deepening ties with Russia, Putin preferred to stay at home too.

However, there is no general decline in international cooperation. As demonstrated by the G7 Summit in Cornwall in June, the most powerful countries—minus China and Russia—are strengthening their cooperation. The big issue is geopolitical conflict. The United States (US) have rediscovered the benefits of cooperation with like-minded countries. In a range of areas, first and foremost security, the US has returned to the conference table. Whilst Donald Trump deserves credit for having made the geopolitical conflict with China a prominent issue, Joe Biden has been trying to forge alliances and can claim some success already.

The G7 Summit earlier this year saw the attendance of Australia, India, South Korea, and South Africa. Thus, there is not much difference between the G-20 minus in Rome and the G7 plus in Cornwall; the membership of these two groups appears to converge. The G7 plus can be seen as an Anti-China coalition. Some G20 countries, Germany in particular, would resists such a label. But the evidence is mounting that all over the industrialised world, scepticism regarding the People’s Republic of China is rising.

Apart from China and climate change, which will be dealt with Glasgow in November, there are many other topics that require attention. Perhaps, the most important one is the looming financial turbulence. Inflation is on the rise in many economies. For monetary policy in the G20 countries, this is a big issue because of diverging responses: Whilst the Federal Reserve and the Bank of England have indicated that they will tighten monetary policy in 2022, the big outlier is the European Central Bank (ECB). The ECB has refused to consider the current level of inflation as dangerous. In Frankfurt, they pray that next year inflation will return to pre-pandemic levels. But if this is not going to happen, the ECB will probably not act because it fears that rising interest rates could stymie economic normalisation in the member countries of the monetary union.

Of course, that would be Europe’s business if there are no effects on the exchange rate. Today, the Euro’s level of undervaluation against the Dollar is estimated to be about 15 percent. Should the Federal Reserve tighten monetary policy and the ECB doesn’t, an exchange rate of 1 to 1 and the concomitant  rising undervaluation of the Euro are quite likely to occur. Therefore, the coordination of monetary policy would be an ideal topic for the G20 meeting in Rome, but it will not feature prominently on the agenda.

Whilst the US under Joe Biden have returned to the multilateral table, the Europeans continue to be difficult partners. On China, Germany in particular continues to favour a policy that emphasises business interests and blends out the increasingly offensive foreign policy of Beijing. In finance, the Europeans continue to prefer a selfish monetary policy that ignores the effects of the undervaluation of the Euro on other countries. The pictures from Rome will probably be attractive, but the G20 Summit will not offer solutions, neither with regard to China nor with respect to the need to avoid financial turbulence.

The views expressed above belong to the author(s).