G20 could mark shift in economic power

Hugues Honore of AFPLast week's eurozone rescue deal struck depends heavily on the response of especially China but also Russia, Brazil, India and South Africa -- the so-called "BRICS" -- for contributions to a European Union (EU) rescue mechanism. French President Nicolas Sarkozy called Chinese President Hu Jintao just as the deal was set last Thursday, and a day later the head of the Emergency Financial Stability Facility (ESAF), Klaus Regling, was in Beijing for talks. "If the Chinese, who have 60 per cent of global reserves, decide to invest in the euro instead of the dollar, why refuse?" Sarkozy said. Regling was in China to discuss raising hundreds of billions of euros for the EFSF, though he downplayed what he insisted was a regular visit. Asian countries already hold 40 per cent of EFSF debt, in testament to the BRICS' huge reserve stockpiles. China holds a whopping $3.2 trillion in foreign reserves. The other four, together, have about $1.1 trillion. How the deal would take shape remains unclear. European leaders want to boost the financing strength of the EFSF to 1.0 trillion euros ($1.4 trillion), from the current 250 billion euros. Media reports said China was being asked for 100 billion euros. That could mean raising more money directly for the EFSF, which could then be leveraged, or setting up a parallel special vehicle for money from the BRICS, Japan and others, for instance Middle East oil states. The money would then be used to support the eurozone's weakest economies and stabilize markets for their debt, protecting the potential next victims of debt contagion like Spain and Italy. Early proposals suggested the International Monetary Fund (IMF) would manage and direct any additional funds from the BRICS, with the global crisis lender acknowledging its own funds for such a huge task were limited. Instead, there is talk the IMF would oversee the operation through the EFSF, as potential lenders fear they could end up like the banks which were late last month compelled to write off half the face value of their Greek bonds. Details could be worked out at the Group of 20 meeting November 03 and 04, where implementation of the new eurozone plan will likely be the main topic. But the simple fact of the Europeans asking for help from China, a country they once carved up into colonial outposts, marks an epochal shift of power.If other BRICS come into the deal -- and Russia, Brazil and South Africa have signaled their interest -- it would only make the shift more momentous. The five have already made a push for more say in the IMF, long dominated by the United States, Europe and Japan. That has been answered by a measured plan to slowly increase their financial contributions and voting stakes. But with the US, European and Japanese economies all in difficulty, the BRICS' time could come sooner than thought. "The limit that the IMF faces in the future is financing, and funding has to come from those capital-surplus countries," said Bessma Momani, an IMF specialist at Canada's University of Waterloo. "The IMF will need to do some serious reform and allow a shift of power from the European countries, that are still over-represented by any measure, to emerging-market economies." The move would confirm the success of years of strong growth rooted in the economic liberalization promoted by the West and the IMF. It is a complete turnaround for some. In 2007 Brazil finished repaying what at the time was the largest-ever IMF loan, $26 billion granted in 2002. And Russia, which defaulted on its debt in 1998, repaid all its IMF obligations in 2005. Daniel Bradlow, a law professor at American University in Washington, called it "a first in modern history" that developing countries would be directly bailing out their advanced counterparts. "Formally they don't get anything" in return, Bradlow told AFP. "Informally I suspect there must be discussions about what the quid pro quo would be," he said, such as possibly a greater role in running the IMF. Another report by AFP adds: The leaders of the world's economic powerhouses meet on November 03 and 04 (Thursday and Friday) in the French seaside resort of Cannes hoping to agree measures to head off the threat of global recession. Between them, the G20 leaders represent economies that generate around 85 per cent of global output, and their summit will be dominated by the search for growth and the European plan to contain the eurozone debt crisis. But, in this the last week of France's G20 presidency, the group will also be called upon to study a number of specific economic issues. Here is a breakdown of some of the other questions on the table: Bank Bonuses: The G20's current chairman, summit host President Nicolas Sarkozy of France, has branded the traders' bonus culture in the world's banks a "perverse incentive" to take dangerous risks on the market. Two years ago at the G20 summit in Pittsburgh, world leaders issued a deal to better limit and regulate pay-out, and the subject will be on the agenda once again in Cannes. With many EU banks in need of state aid to recapitalise, some European countries are pushing forward with regulation, but there remains reticence in the United States to further tighten the rules. Tax Havens: The leaders will be presented with reports from a global forum on banking secrecy and tax avoidance run by the Organisation for Economic Corporation of Development (OECD), detailing which countries still allow foreign nationals to hide revenue in offshore banks. Switzerland is still under pressure to do more to open up its banks to scrutiny, and the reports finger Brunei, Uruguay and Vanuatu for criticism. France will press for tougher global measures against backsliders. Financial Transaction Tax: France and Germany have been pushing for a small tax on financial transactions as a mechanism to force markets to help pay for government efforts to rescue an economy laid low in part by their excesses. The idea ran into opposition from the United States, Canada, Russia and China and Paris and Berlin are now resigned to going it alone, either in the 17-nation eurozone or simply bilaterally. They will brief their comrades on this plan, and perhaps push for different global measures raise funds to fight poverty and climate change, such as a tax on shipping. International Financial Reform: Another area in which France's grand G20 ambitions have been derailed by political and economic reality is the plan to use regulation to stablise and "re-found" global financial capitalism. But meeting earlier last month in Paris, G20 finance ministers said they had made "fundamental" breakthrough in the quest for new ways to manage and in some cases limit global capital flows. The Yuan: Underlying much of the instability in global markets is the massive trade imbalance between China and its US and European Union (EU) partners, blamed in the West on Beijing's reluctance to let its currency the yuan appreciate. With Europe going cap in hand to seek investment in its debt repayment vehicles, there is likely to be less overt pressure on China, but France hopes for progress on the yuan's incorporation in the IMF's Special Drawing Rights. The SDR is a sort of global reserve asset based on a basket of major currencies, and the yuan's inclusion would lead to it eventually becoming de facto convertible.