The Group of Seven

Andrew Baker

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781134256372
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

We are now in the era of the G8, although the G7 still exists as a grouping for Finance Ministers. Why do G7 finance ministries and central banks co-operate? What are the implications of this co-operation for US power and the abilities of the other six states to exercise leadership? What role do the G7 play in global financial governance? How much authority do they possess and how is that authority exercised?

This is the first major monograph on the political economy of G7 finance ministry and central bank co-operation. It argues that to understand the contribution of the G7 to global financial governance it is necessary to locate the process in the context of a wider world financial order comprised of decentralized globalization. It also provides original case study material on the G7's contribution to macroeconomic governance and to debates on the global financial architecture over the last decade. It assesses the G7's role in producing a system of global financial governance based on market supremacy and technocratic transgovernmental consensus and articulates normative criticisms of the G7's exclusivity.

For researchers in the fields of IR/IPE generally, postgraduate students in the field of international organization and global governance, policy makers and financial journalists this is the most extensive analysis of the G7 and the political economy of global financial governance to date.

1Introduction

The Group of Seven and Global Financial Governance

Since the 1980s the international monetary and financial landscape has been dramatically transformed. Foreign exchange and derivatives trading has risen exponentially. By 2001 daily turnover in these markets stood at $1,210 billion, dwarfing trade in goods and services.1 Many financial markets now operate 24 hours a day, with world financial cities linked by extensive computer networks reducing the immediate importance of time and location.2 However, in this brave new interconnected financial world, volatility, instability and disturbance have been constant threats. One of the City of London’s most venerable institutions, and a seemingly solvent financial concern – Baring’s – collapsed almost overnight in 1995. Repeated contagious financial and exchange rate crises, mainly originating in emerging markets from Asia to Latin America, rocked the global financial system, and deprived citizens in these countries of incomes and savings following rapid and hasty capital account liberalization. The European monetary system was also blighted by turbulence in 1992 as central banks experienced severe losses at the hands of speculators, while North America did not escape unaffected by events in emerging market in 1997–8. More recently, the United States has been blighted by corporate financial scandals, most notably Enron. And against this turbulent backdrop European states created a new single currency in an unprecedented act of monetary union amongst sovereign nation states.

In this context, questions of global financial and monetary governance have become ever more prominent. Yet despite a decade of turbulence and change, the meetings of finance ministries and central banks from the world’s leading industrialized nations, the Group of Seven (G7 – Canada, France, Germany, Italy, Japan, UK, US), have retained a prominent, if ambiguous and not easily definable role in directing and steering governance and development trajectories in an increasingly diffused, but interconnected global financial system. Since the 1960s, finance ministries and central banks from the wealthiest nations have met several times a year to consult with one another and exchange views on international economic conditions (first as the G10, later as the G5, then as the G7, see Chapter 2).3 Over time, it is the G7 finance ministers and central bankers round of meetings, or the G7 process, that has become the pre-eminent forum for the formulation of international monetary policy and has been regarded as the most important locus of authority in global financial governance.4 The meetings of the Group of Seven finance ministries and central banks have been used to discuss national macroeconomic and exchange rate policies, to develop shared policies in relation to the international financial institutions, and to reach agreement on the general design of the global financial system. In other words, the collective choices, policies and decisions of G7 finance ministries and central banks, or indeed the lack of them, are central to global financial governance – the decisions and decision-making processes that determine how the international monetary and financial system is organized, the array of mechanisms for preventing and responding to international financial disturbance and the procedures and norms that set the parameters for and inform transnational market operations.

However, for most of the last decade, save for one short policy-orientated study, academics, particularly political scientists, paid little attention to the interactions of the G7 finance ministries and central banks as an ongoing regularised multilateral process.5 This changed with the publication of a series of volumes by the Canadian-based G8 Research Centre at the University of Toronto. However, much of the Toronto group’s work is informed by a liberal institutionalist assumption that international co-operation is a positive public international good, regardless of its social purpose or content. In my view this has resulted in an insufficiently critical approach to G7 co-operation, which neglects many of the G7’s deficiencies, including its unrepresentative exclusive membership and the resulting narrow technocratic approach to global financial governance that leaves many countries and political constituencies feeling excluded. Furthermore, despite a comprehensive commentary on the G7’s response to the Asian financial crisis and several volumes on the issue of the global financial architecture,6 we are yet to see a theoretically grounded and carefully researched up-to-date monograph about the G7 finance ministries and central banks’ regular meetings that discusses the dynamics of these institutions’ interactions and diplomacy, examines what drives their co-operation, and assesses their wider collective authority and influence including their general contribution to global financial governance.7 It is this gap that this book intends to fill.

This book sets out to make four broad contributions to the existing literature. First, it seeks to provide the most theoretically informed and critical examination of co-operation between G7 finance ministries and central banks on macroeconomic and financial matters, as well as the most detailed treatment of the dynamics of the politics and the norms of that co-operation. Second, it aims to shed light on debates concerning the extent of US power in global financial governance as evident in the activities of the Group of Seven. Third, it explores the authority of the G7 and its contribution to global financial governance in the context of the emergence of a complex, interconnected, transborder financial system and the governance challenges this poses.8 Fourth, this book articulates normative criticisms of the G7 process based on its exclusive, unrepresentative membership, its general lack of inclusion, or dialogue with wider societal actors and the very narrow technocratic, and essentially neo-liberal view of global financial governance, that the finance ministries and central banks have promoted and protected. Such an approach has paid insufficient attention to the political and social consequences of liberalized finance, privileging established financial interests in the leading financial centres of developed countries, contributing to a legitimacy crisis and a democratic deficit in global financial governance.9

Section 1 of this introduction introduces the G7 process. Section 2 covers the various research agendas to be pursued. Section 3 outlines and justifies the scope of the study. Section 4 sets out the chapter structure of the book. The final section provides a brief note on the methodology used in the research for the book.

Introducing the G7 Process

The G7 finance ministers and central bankers’ process consists of an annual cycle of three or four meetings at ministerial level, six to ten meetings between senior officials (the deputies) and a number of more informal communications via email and telephone conference calls. The process has no official legal status, no permanent home base and no secretariat. The initial rationale for these meetings was the need to manage a condition of economic interdependence, first recognized in academic writings in the late 1960s.10 As product and capital markets became increasingly intertwined, so developments in one national economy had a bigger impact on the performance of other economies. State agencies with responsibility for national economic performance therefore had an obvious self-interest in exchanging information on the future intentions and projections of their national counterparts so as to increase the pool of information on which to base their own national policy decisions.11 Furthermore, due to their responsibilities in relation to national currencies and national financial sectors, finance ministries and central banks have always been concerned with systemic issues relating to financial stability. The G7 process has come to act as a forum for the discussion and formulation of joint positions on many issues relating to the design of the international financial system.

In 1973, finance ministers met as a G4 in the library of the White House to discuss the repercussions of the decision to take the dollar off the gold standard and the collapse of the Bretton Woods exchange rate system. They later met as a G5 and were joined by the central banks governors, subsequently drafting an agreement in 1975 on the legal foundations for the new international monetary system.12 From 1986 onwards the finance ministries and central banks met as a Group of Seven and intensified their multilateral surveillance activities.

Traditionally, the G7 process has been associated with economic policy coordination, or exchange rate management because of episodes like the Bonn locomotive strategy of 1978, or the Plaza and Louvre agreements of the 1980s.13 The Bonn locomotive strategy consisted of a package deal agreed between the G7 countries in an effort to generate global growth, while the Plaza and Louvre agreements included adjustments to domestic policies and exchange market interventions to stabilize exchange rates between the major currencies. Over the last decade however, there has been an absence of these sorts of grand macroeconomic and exchange rate bargains. Instead recent G7 activities have revolved around managing financial crises, instigating long-term responses to those crises and outlining, protecting and promoting core principles for macroeconomic policy and global financial governance.

Some of the economics literature has attempted to draw a distinction between co-operation and policy co-ordination, which is useful for the purposes of this study.14 Co-ordination is best viewed as international agreements that include precise pre-negotiated adjustments to domestic policies, or what Putnam and Henning have called reciprocal ‘package deals’ involving mutual commitments.15 Such coordination can take the form of co-ordinated macroeconomic expansions, or ‘international Keynesianism’ – so as to generate economic growth, exchange rate agreements and mutually agreed monetary policy adjustments to produce exchange rate stability and ease balance of payments discrepancies, or the collective reestablishment of capital controls to prevent destabilizing foreign exchange speculation.16 Co-operation on the other hand is best seen as a looser process. Here, it is taken to mean the sharing of information, experiences and opinion, or a combination of ‘consultation’ and ‘enlightenment/learning’, as well as the identification of common interests, objectives and causal beliefs by a group of actors who then seek to collectively promote those interests, objectives and beliefs, domestically and elsewhere.17

Research Agendas

This book has three principal empirical research objectives: 1) to establish the form and determinants of interaction and co-operation between G7 finance ministries and central banks at their regular meetings; 2) to examine and establish the patterns of power and authority evident at G7 meetings, examine how these patterns influence G7 outcomes and the implications of this for the exercise of power and authority in global financial governance more generally and most especially for US power; 3) to assess the wider contribution of the G7 to global financial governance and their collective authority in an era of ‘decentralized globalization’.

The Form and Determinants of Interaction and Co-Operation between G7 Finance Ministries and Central Banks

The first empirical research agenda in this book involves the identification and explanation of the type/s of co-operation that characterize the G7 process and asks what factors have most influence in shaping and determining the form of G7 interaction and co-operation. Various factors come into play when considering G7 interactions, including the social practices, routines and conventions of finance ministry and central bank elites; the technical economic beliefs and ideas that these elites hold; perceptions of national interest; the relationship the finance ministries and central banks have with different domestic constituencies and the extent to which they operate on behalf of these constituencies; the degree of domestic institutional autonomy the finance ministries and central banks enjoy, including formal and informal relationships with other state agencies; and the impact of the rise of international capital mobility and the continuous trans-national market scrutiny of a range of national policies that has accompanied this.

An obvious research question to explore is why the kind of policy co-ordination referred to in the previous section has been replaced by a looser but more far-reaching form of co-operation and which factors account for the apparent demise in formal bargaining and co-ordinated policy agreements. Existing literature on G7 co-operation and/or co-ordination provides some guidance here. Michael Webb argued that policy co-ordination in the 1980s, and to a lesser extent the late 1970s, involved adjustments to domestic monetary and fiscal policies, rather than symptom-management policies such as exchange market interventions, because domestic action was required to address the larger payments and currency imbalances generated by rising international capital mobility. Webb’s argument was that international capital mobility was a structural feature of the international system and was the most important factor explaining instances of G7 policy coordination.18 However, further intensification in the speed and volume of international capital flows has seen a demise in the kinds of policy co-ordination that characterized the 1980s (see Chapter 2 for more of a discussion). Fred Bergsten and Randall Henning of the Institute of International Economics have pointed to a number of inter-related factors that have caused this, such as policy-makers’ perceptions of limited macroeconomic effectiveness (other than to deliver a stable low inflationary environment) in the face of financial globalization, domestic institutional changes such as the rise of independent central banks and fiscal rules that make national macroeconomic policy less discretionary and finally what they call a consensus, or non-aggression pact, where states refuse to be too critical of one another’s policies.19

A further interpretation of international financial relations is provided by Randall Henning in his compelling study of exchange rate diplomacy between the major powers in the 1970s and 1980s. Henning argued that the domestic political economies of the leading states and patterns of domestic interest politics, evident in the relationship between national financial and industrial sectors primarily determined the major states’ exchange rate policies.20 This is particularly important given the perceived division between and different needs of Anglo-American financial sectors with arm’s length relations with industry and the less market-oriented and more socially embedded financial sectors of Japan and continental Europe.21 How much influence do these differences in the political economies of the G7 countries have on G7 diplomacy and financial relations and how much purchase do domestic political economy explanations of international financial relations have? It is also notable that the most authoritative account of the Plaza Agreement of 1985 demonstrated that US domestic interest-based politics was the principal driving force behind that episode of exchange rate co-operation.22 How certain domestic interests and positions are promoted during the course of G7 deliberations and how certain interests are represented in the institutional arrangements of G7 finance ministries and central banks cannot therefore be ignored in explanations of contemporary G7 co-operation.

What is required is a way of examining the inter-relationship and interactions between elite causal and normative beliefs, shared elite social practices, behavioural routines, procedures and understandings, domestic interests and institutional politics, and the challenges and pressures that a more geographically interconnected but diffused financial system places on policy-makers. The approach adopted here maintains that it is not sufficient to consider solely how elites behave at G7 meetings, or how they interact with one another, rather we need to acknowledge that they are responding to pressures from several discrete but overlapping spatial dimensions simultaneously. Multilateralism, in other words, needs to be placed in a wider spatial social, political and material or structural context.23 The basic premise of the approach adopted here is that explaining the behaviour and strategies of states in the global political economy requires an effort to examine the relations and multiple linkages between national, international and global realms and between state and non-state actors.

A framework of multi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of illustrations
• Foreword
• Acknowledgements
• 1. Introduction: the Group of Seven and global financial governance
• 2. The evolution of the Group of Seven and the re-emergence of global finance: the historical context
• 3. Situating the Group of Seven in a context of decentralized financial globalization: a four-dimensional framework
• 4. The Group of Seven and the politics of financial ideas: the durability of the economic consensus of the 1990s
• 5. The Group of Seven as a multi-spatial transgovernmental actor in world politics: four-dimensional diplomacy in practice
• 6. The Group of Seven and macroeconomic governance: discourse, declaratory policy and market supremacy
• 7. The Group of Seven and the global financial architecture: the institutional and ideational foundations of market supremacy
• 8. Conclusions: global financial governance and the Group of Seven as a senior transgovernmental coalition
• Notes
• Bibliography
• Index