G20 SUMMIT Canned heatWhere Victorianaristocrats trod,modern­daypoliticians followPage 4FINANCIAL TIMES SPECIAL REPORT | Thursday November 3 2011

www.ft.com/g20­2011 | twitter.com/ftreports

InsideRecord of G20 ChrisGiles finds decisivenessis in short supply amongglobal leaders Page 2

Global rebalancingA grand plan has beenthwarted by mutualsuspicion, writesAlan Beattie Page 2

Eurozone crisisAngela Merkelhas been in thethick of it, saysRalph AtkinsPage 2

BanksExecutivesincludingPeterSands ofStandardChartered are battlingagainst Basel III, writesBrooke Masters Page 3

French economy Stepsare finally being taken tocut state spending, saysHugh Carnegy Page 4

Cannes Paul Bettsprofiles thesummit’s host city

Page 4

It is crunch time forthe Group of 20. Ifthings go well, theCannes summit will

mark the moment the “pre-mier global economicforum” acts to defuse theeconomic risks being run inthe world.

The alternative is toallow them to fester, con-tributing towards anotherdestructive financial andeconomic crisis.

Underlining the urgency,the International MonetaryFund declared in mid-October: “The immediaterisk is that the global econ-omy tips into a downwardspiral of increased uncer-tainty and risk aversion,dysfunctional financial mar-kets, unsustainable debtdynamics, falling demand,and rising unemployment.”

Three challenges stalkthe global economy.

Most pressing is thedeclining outlook forgrowth, which has becomeevident in the weeks follow-ing the IMF annual meet-ings in late September.

Then, the IMF hadalready downgraded its eco-nomic forecasts and warnedof further risks, but most

emerging economies werestill growing rapidly andhad experienced little fall-out from the slowdown inalmost all advanced econo-mies.

Six weeks on, the worldoutlook seems darker, andMonday’s announcementthat Greece will hold a ref-erendum on a second EUbail-out agreement has onlyintensified the anxiety. Asthe Organisation for Eco-nomic Co-operation andDevelopment outlined ear-lier on Monday, “Uncertain-ties regarding the short-term economic outlookhave risen dramatically inrecent months.”

The OECD significantlydowngraded its 2012 growthforecast for advanced econ-omies, cutting the eurozoneforecast from 2 to only 0.3per cent and its US forecastfrom 3.1 to 2 per cent.

A rapidly cooling globaleconomy is both a conse-quence and a cause of theeurozone sovereign debt cri-sis, the second challenge.

Fixing the existential cri-sis of the European singlecurrency – one that hasfrayed investors’ nerves andknocked business and con-sumer confidence since thesummer – is a pre-requisitefor a safer global economynext year.

The crisis has manydimensions: the insolventGreek economy; a dip inconfidence in the peripheralsovereign debt of Italy andSpain that is increasingtheir borrowing costs sub-stantially; and a weakness

in the balance sheets ofEuropean banks that aresitting on these assets.

The issues are inextrica-bly linked and must beaddressed as a whole. Thisis recognised by both theFrench and German govern-ments’ commitment to a“comprehensive plan”, theoutlines of which wererevealed last Thursdaymorning.

If the eurozone crisiswere not difficult enough,deep trade imbalances arethe third challenge facingthe G20.

According to the IMF,current policies on tradeand exchange rates suggestthat enormous currentaccount surpluses in China,Japan, Germany and rela-tively poor oil exporters areset to continue, forcing evermore capital to flow tofinance deficits elsewherewhich must balance thesurpluses.

Since well before the cri-sis, individuals and govern-ments in surplus countriesenjoyed building claims ondeficit countries, but muchof this capital ended upfinancing increasingly riskyactivity at cheap rates –subprime mortgages andperipheral eurozone sover-eign debt – adding to therisks that these investmentflows would end in crisisand huge losses.

As Mervyn King, gover-nor of the Bank of England,said recently: “From thevery beginning of the globalcrisis there has been areluctance by governments

to face up to the underlyingsolvency problems gener-ated by apparently unend-ing trade deficits with nomechanism – whether flexi-ble exchange rates or someother means – for correct-ing these disequilibria.”

In short, the task for theG20 summit is to acceleratesolutions to the latter twochallenges so as to mitigatethe slowing global economyand set it on a path towardsthe G20’s long-standingambition of “strong, stableand balanced” growth.

France, the chair of theG20 in 2011, is well aware ofwhat needs to be done.

Speaking to the United

Nations a week before thesummit, Jean-David Levitte,the diplomatic adviser onthe G20 to Nicolas Sarkozy,the French president, recog-nised the original agenda ofthe summit must be torn upand replaced with a co-ordi-nated response, because “noone is immune from theeconomic crisis”.

He said: “France is callingon all G20 countries toadopt measures adapted tothe situation and on allcountries that don’t belongto the G20 to support thecollective efforts that willbe undertaken to restoreconfidence.”

For the G20 to play a part

in any solution to the euro-zone woes, non-members ofthe single currency areamade clear at a financeministers’ meeting in Parisin mid-October the euronations had to demonstratethey had a “decisive” planto save the single currency.

That plan – the outlinesof which were agreed at aeurozone summit a weekbefore the G20 summit –included a comprehensiverecapitalisation of Euro-pean banks, a 50 per centvoluntary writedown ofGreek debt, a beefed-upfund to prevent

Dark outlookpiles pressureon leadersA cooling worldeconomy, the eurocrisis and tradeimbalances providea grim backdrop totalks in Cannes,writes Chris Giles

IMF growth forecastsAnnual % change in real GDP

-2 0 2 4 6 8 10

World

Advanced

US

Eurozone

Japan

UK

Developing

China

India

Brazil

Russia

20112012

Global imbalancesCurrent account balances as a % of world GDP

-2.0

-3.0

-1.0

0

1.0

2.0

3.0

200001 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Germany & JapanEmerging Asia

Other developed countries

Oil exportersUSRest of the world

Bond spreads

Sources: Thomson Reuters Datastream; IMF Photo: AFP/Getty

Spanish and Italian spreads overGerman 10-year Bunds (basispoints)

Jan 2010 Oct110

100

200

300

400

Spain

Italy

Anti-G20 placard in Nice, France this September

Continued on Page 3

2 ★ FINANCIAL TIMES THURSDAY NOVEMBER 3 2011

G20 Summit

Living up to being “the premierglobal economic forum” hasproved challenging for theGroup of 20 ever since its mem-bers elevated the group to thatrole in 2009.

With the eurozone sovereigndebt crisis threatening the glo-bal economic order, the grouphas perhaps its most difficultchallenge yet at the Cannessummit.

The question is whether itwill succeed or squander thechance to demonstrate its globalimportance.

There is no doubt the calendarthis autumn has put the G20 inpole position. Since mid-Septem-ber, international meetings havebeen scheduled almost everyweekend with the deadline ofarriving at a “comprehensiveplan” for saving the euro by thetime of Cannes.

The summit is therefore theclimax of the year’s negotia-tions. Any failure there to

stamp a global seal of approvalon to the eurozone outline planagreed a week before the sum-mit will not be followed in shortorder by another scheduledevent.

There cannot be another post-ponement of difficult decisions,unless world leaders simultane-ously decide to arrange emer-gency summits either in Europeor at a global level.

For those awaiting decisivemoves from the G20 in Cannes,a look at recent history providesmore cause for concern thanhope. Since the financial crisisturned nasty in 2008, the G20has achieved significantly lessthan its supporters and summithosts have generally claimed.

Before 2008, the G20 wasmerely an annual gathering offinance ministers establishedafter the Asian financial crisis adecade earlier, and few peopleexpected much from its meet-ings. But after Lehman Brotherscollapsed in September 2008, afirst leaders’ summit was hast-ily arranged for that November.

But before the G20 could meetin 2008, the Group of Sevenfinance ministers took all thedifficult decisions, ensuringthere would be no more bankfailures, a guarantee of liquidityto financial markets: banks

would be recapitalised anddepositor protection bullet-proofed. That left the G20 tofocus on additional matters,such as a pledge to complete thestill-unfinished Doha traderound by the end of 2008 and ahalfhearted commitment to fis-cal stimulus.

The April 2009 London sum-mit is generally seen as themoment the G20 came of age,when it reversed the economicdownturn with an audaciousinternational package includingwhat Gordon Brown, then UKprime minister, boasted was thelargest fiscal stimulus “theworld has ever seen” and whathe called a $1,000bn “pro-gramme of support to restorecredit, growth and jobs in theworld economy”.

The summit outcomes were,in truth, less than the claims,with nothing new announced onfiscal stimulus. The moneygiven to the International Mone-tary Fund had a limited immedi-ate effect on the crisis and therewas no agreement on cleaningup the toxic assets in banks.The last issue has been some-thing that has subsequentlycome to haunt the countries –particularly in the eurozone –that did not take unilateralaction in that regard.

The subsequent summits haveachieved little more. In Septem-ber 2009, the Pittsburgh summitwas notable for establishing theaim of “strong, sustainable andbalanced” world growth and aprocess to achieve it, which hasinched forward ever since.

Come the Toronto summit ofJune 2010, the global recoverywas in full swing and sentimenthad shifted to fiscal consolida-tion so leaders agreed to halve

deficits by 2013, as they wereplanning to do so already.

The November 2010 Seoulsummit was marked mostclearly by divisions. In a rancor-ous meeting – with constantspats between the US and China– the G20 achieved little save fordelays in the process strivingfor balanced growth, dressed upas progress towards the goal.

Professor Eswar Prasad ofCornell University in the US

says the underlying problem isthat countries put their nationalinterests first and are willing toagree to multilateral deals onlyif they seem to square withtheir national interest.

He says: “Rifts among G20countries tend to becomeexposed in calmer times, whichprevents the group from takinga more concerted approach tolonger-term objectives such asunified financial regulatorystandards and reform of theinternational monetary system.”

Ousmène Mandeng of UBSsays the G20 missed an opportu-nity to remain relevant in 2011.“Failure to address criticalissues and to guide marketexpectations when the goingwas rough has undoubtedlyweakened its relevance and itwill take some proactive engage-ment to restore the image of aneffective body, a reputation ithad after Pittsburgh at thebeginning of the crisis,” he says.

Since differences of outlookdominate the G20, the G8 hasagain had more success in mak-ing decisions in 2011. This year,France has chaired both the G8and G20 and originally plannedto take the opportunity to burythe smaller grouping.

France decided against.Instead, its finance ministry has

held numerous teleconferencesamong G7 finance ministers(excluding Russia, which is amember of the G8); it organisedco-ordinated intervention in cur-rency markets in March to helpJapan force the yen down fol-lowing its earthquake and tsu-nami; and in August it alsooffered a backstop to panickingfinancial markets.

Finance ministers prefer G8meetings, they say privately,because they offer a smallerforum to discuss events pri-vately and freely without hav-ing to make speeches to hun-dreds of people. Instead ofdying, the G8 is alive, well andalready has a summit in thediary for Chicago next May.

Not only is the G20 unwieldy,but it also has a legitimacyproblem. Although much morerepresentative of the globaleconomy than the G8, the widergroup does not include all theworld’s 20 largest economies.Spain, for example, tends torank somewhere near 13th inthe world but merely hasobserver status. South Africa,the only African nation in theG20 as of right, has an economythat tends to rank close to 25th.

Hangers-on also abound. AtG20 summits, these generallyinclude the United Nations, the

chair of the African Union, thepresident of the EuropeanUnion, the head of Asean, theIMF, the World Bank, the Inter-national Labour Organisation,the Organisation for EconomicCo-operation and Development,the World Trade Organisationand the Financial StabilityBoard.

With such a cast list, deci-sions are difficult to agree at aG20 summit unless comprehen-sively trailed in advance.

The Cannes summit thereforehas more of a challenge thanusual in defusing a crisis thatthreatens the global economy.

Whether it can move fromplatitudes to policy on the euro-zone and on global imbalanceswill be the test of its relevanceas a body, even if it has alreadyshown itself to be short of theworld’s premier global economicforum.

Meetings yet to reach the peak of achievementHistoryChris Giles findsdecisiveness in shortsupply at the globalleaders’ conferences

‘It will take someproactive engagementto restore the image ofan effective body, areputation [the G20]had after Pittsburgh’

Having been elevated fromfinance minister to head ofgovernment level in Novem-ber 2008 in the middle of thedeepest financial crisissince the Great Depression,the G20 spent most of itsfirst year on crisis fightingrather than grand designsfor the global economy.

The April 2009 summit inLondon was notable for acall for monetary and fiscalpolicy to stimulate the glo-bal economy and for offer-ing a string of promises ofvarying reliability abouthow the G20 would pumpliquidity into the interna-tional system and prevent acollapse in world trade.

As soon as the crisisbegan to recede in 2009,enthusiasts for the G20process, flushed with whatthey considered to be suc-cess from its early months,wondered if it could beturned to addressingchronic underlying prob-lems rather than simply bean emergency service calledto acute cases of economicdistress.

Out of this curiosity camewhat were touted as grandschemes for rebalancing theworld economy.

Global current accountimbalances – the US deficitbeing matched by surplusesin China, Japan and a fewother countries – had beenone of the main preoccupa-tions of policymakers beforethe global financial crisis in2008 drew their attention tomore pressing concerns.

The US, in particular, hadtried a variety of ways topersuade China to allowmore flexibility in the ren-minbi, including directbilateral pressure on Bei-jing, pressing the Interna-tional Monetary Fund tosharpen its analysis ofexchange rates, and conven-ing a group of countrieswithin the IMF under therubric of multilateral sur-veillance.

None of these had con-spicuous success, with theUS’s enthusiasm for lettingthe renminbi rise not beingmatched to quite the sameextent by other large econo-mies, including the euro-zone.

In any case, Chinaresisted pressure appliedthrough any and all ofthese channels – to theextent where Beijing ineffect blocked the IMF fromproducing its annual “Arti-cle 4” health-check on theChinese economy.

Undaunted, the US saw inthe G20 the potential foranother try, and thus at thePittsburgh G20 summit inthe autumn of 2009 wasborn the “mutual assess-ment process” (MAP) – com-missioning the IMF to comeup with suggestions forrebalancing policies thateach G20 government couldfollow.

If Washington believedthis new approach was

likely to sidestep the politi-cal obstacles to the previ-ous ones, it was mistaken.

In theory, the gainsfrom economic co-operationcould be huge. The idea wasthat China could float itscurrency and rebalance itseconomy, shifting demandfrom exports to domesticconsumption. In return, theUS would reduce its fiscaland external deficits.

In practice, the plan hasrun into distinct difficulties– not just in the mutual sus-picion that each side willrenege on its part, but on amore fundamental disagree-ment about what the under-lying problems in the globaleconomy actually are.

The Cannes summit wasintended to be the end pointof a two-year process inwhich the IMF would comeup with suggestions for eco-nomic indicators that eachcountry could adopt as itscontribution to reducingglobal imbalances.

But perhaps the keymoment – and the one thathas caused widespreadscepticism about the abilityof the MAP to succeedwhere similar initiativeshad failed – came in therun-up to the Novembersummit in Seoul last year,when the US pushed hardfor numerical guidelinesincluding targets of 4 percent for current accountsurpluses.

In open disagreement,China fought back hardagainst the idea that thesewould be binding numericalproposals. Beijing receivedsupport from some slightlyunexpected quarters suchas Germany, which fearedthat it would be asked toreduce its current accountsurplus, most likely by loos-ening fiscal policy.

In the end, the G20decided in principle thatguidelines would be pro-duced, but the US failed toget agreement about hardnumerical indicators. Thatdiscord rapidly diminishedthe possibility that theMAP would succeed whereprevious plans had failed.

At the first ministerialmeeting of the G20 under

France’s leadership, inParis in February, Chinaled another successful rear-guard action, this timeblocking the adoption oftargets on foreign exchangereserves.

Beijing also managed tocombine and soften pro-posed guidelines on realexchange rates and currentaccount surpluses and defi-cits into a wider category ofexternal balances.

To add to the plethoraof initiatives, DominiqueStrauss-Kahn, then thehead of the IMF, alsolaunched a series of “spill-over reports”, designed toindicate how the large econ-omies interacted with eachother and affected the glo-bal economy.

The first round of suchreports were published thissummer and signally failedto set the policymakingworld on fire.

The reports made fairlyminimal assessments of theimpact of national policieson the global economy,including a prediction thata revaluation of the ren-minbi would not makemuch difference to US cur-rent account deficits.

With the G20’s attentionhaving been drawn oncemore to the immediatefuture by the eurozone cri-sis, there seems littlechance that the adoption ofguidelines with qualitativeor quantitative indicators atthe Cannes summit is goingto make any practical dif-ference in the short run tothe way that the globaleconomy is run.

If so, they are likely tojoin a growing pile ofinitiatives that have triedand failed to induce co-oper-ation over rebalancing theworld economy.

Mutual suspicionthwarts grand planGlobal rebalancingA move to boostco­operation hashit difficulties,says Alan Beattie

Beijing managed tosoften proposedguidelines on realexchange ratesand currentaccount surpluses

W hat will hap-pen to theeurozone? Therun-up to the

G20 summit has seen fran-tic summit activity inEurope to restore investorconfidence in the conti-nent’s almost 13-year oldmonetary union.

With just days to sparebefore the global gatheringin Cannes, eurozone leadershave agreed a three-pronged strategy to putGreece’s public financesback on a sustainable basis,to strengthen Europeanbanks’ balance sheets, andto beef up the EuropeanFinancial Stability Facility(EFSF) as a multifunctionalrescue vehicle that can“ring fence” crisis-spots.

But considerable doubtremains over whether suchsteps will be sufficient,even before Monday’sannouncement that Greecewill hold a referendum onthe bail--out. lt is not justthat many of the plan’sdetails still have to beworked out, let alone imple-mented. It is also unclearwhether fundamental flawsin the eurozone’s construc-tion have been corrected.

“There is hope that wehave turned an importantcorner,” says Huw Pill,European economist atGoldman Sachs. “But thereare still deeper issues thatneed to be addressed.”

Most crucial are thegovernance of the eurozone– which has a singlecurrency but 17 separate

fiscal authorities – anddivergences in economiccompetitiveness which lieat the heart of its problems.

Beyond the eurozone,especially among interna-tional investors, there isscepticism over whethersome kind of break-up canbe avoided in the long run.

European politics havecertainly given pause forthought. Berlin and Parishave frequently clashedover strategy. The govern-ment of Angela Merkelenvisages a “rules-based”union in which fiscal mis-creants are punished andthe central bank sticks tocontrolling inflation.

The German chancellorhas taken an incrementalapproach to crisis resolu-tion, insisting that prob-lems built up over yearscannot be resolved quickly.

By contrast, NicolasSarkozy, French president,has favoured bolder solu-tions, arguing, for instance,that the European CentralBank should act moreaggressively as a backstopfor governments.

Yet the forces that havedriven Europe’s economicintegration since the secondworld war remain in place,and provide an explanationof why – despite everything– continental Europe’s lead-ers see the only option aspressing ahead with the“project”.

Ms Merkel recently toldGermany’s Bundestag: “Theeuro is a guarantor of aunited Europe, or put itanother way: if the eurofails, Europe fails.”

Jean-Claude Trichet usedmore mercantilist reasoningin a Financial Times inter-view before he steppeddown as ECB president onOctober 31.

“There are more reasonstoday for the Europeans to

unite in economic, financialand monetary fields thanthere were at the beginningof the 1950s,” he said. “Ireally think that the struc-tural transformation of theworld, the formidable eco-nomic success of the emerg-ing countries, of China, ofIndia, of all emerging Asia,of Latin America, calls forthe Europeans to unite verysignificantly.

“One of the main lessonsof the crisis is precisely thatEurope needs more unity.”

The eurozone remains along way from a fiscalunion – but steps towards agreater pooling of sover-eignty have already beenmade that would have beenunimaginable even a fewyears ago.

With the launch of theEFSF, which has powers toraise funds in capital mar-kets, the European Unionhas a prototype common“euro bond”.

Surveillance of fiscal and

competitiveness policies hasalso been strengthened. Attheir Brussels summit onOctober 26, eurozone lead-ers pledged to “strengthenthe economic union tomake it commensurate withmonetary union”.

Under discussion aremeasures that would seeEU authorities, in effect,taking control of the domes-tic policies of eurozonemember states that failed tofollow its rules. Changes totreaties are on the agenda.

The big test of whether itcan all work will be whathappens to Greece. Thecountry’s mountainous pub-lic sector debt – masked byunreliable statistics – andsevere loss of economiccompetitiveness triggeredthe eruption of the euro-zone debt crisis in early2010.

Since then, Greece’s prob-lems have escalated, as theAthens government failedto implement ambitiousstructural reform plansdemanded by internationalcreditors. The country hasbeen plunged into a deeprecession and images ofviolent protests are beameddaily around the world.

At the October 26 sum-mit, Greece was givenanother chance. An agree-ment on a larger “privatesector involvement” isaimed at bringing the coun-try’s debt down to a man-ageable 120 per cent ofgross domestic product –compared with official fore-casts that it could rise tonearly 200 per cent.

Until signs of a sustaina-ble Greek economic turn-round emerge, however, itwill be unclear whether thenecessary adjustment inwages and other costs willbe possible because mone-tary union rules out cur-rency devaluations.

As a result, the possibilityremains of Greece leavingthe eurozone.

A return to the drachmamight bring short-termgains in terms of competi-tiveness – but the benefitsare far from clear, given theenormous disruption awithdrawal from the euro-zone would cause.

Beyond Greek borders,however, talk of allowingcountries to exit the euro-zone has started – in thecontext of a strengthenedpolitical union.

Mark Rutte, the Dutchprime minister, forinstance, has argued for aEuropean commissioner forbudget discipline with pow-ers to force a country to putits finances in order.

“Countries that do notwant to submit to thisregime can choose to leavethe eurozone,” he wrote inthe FT last month.

The risk of allowing onecountry to exit at somepoint in the future would beserious “contagion effects”,as financial markets bet onthe next member to leave.

More immediately, thefirewalls put in place byeurozone leaders, includingthe enhanced EFSF, mayprove insufficient to restoreinvestor confidence beyondthe short term.

So far, the ECB, whichhas theoretically unlimitedfirepower, has explicitlyrefused to become thelender of last resort for gov-ernments.

For all Germany’s com-mitment to European inte-gration, its voters remaindeeply wary of the potentialcost of its support for coun-tries such as Greece.

A eurozone break-upwould be a bitter blow for ageneration of Europeanleaders – but not yet a sce-nario that can be ruled out.

Rescue raises doubts overdetails and deeper issuesEurozone optionsThe single currencyis not yet out ofthe woods, writesRalph Atkins

Double act: Angela Merkel and Nicolas Sarkozy arrive at last week’s European Council summit to solve the eurozone debt crisis Bloomberg

Eswar Prasad: rifts prevent action

ContributorsChris GilesEconomics Editor

Ralph AtkinsFrankfurt Bureau Chief

Alan BeattieInternational EconomyEditor

Paul BettsEuropean BusinessCorrespondent

Hugh CarnegyParis Bureau Chief

Claire JonesMoney Supply andEconomics Team Writer

Brooke MastersChief RegulationCorrespondent

Andrew BaxterCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact: Robert Grange,Phone +44 (0)20 78734418; Fax +44 (0)20 78734006; Email:robert.grange@ft.com

All FT Reports areavailable on FT.com atwww.ft.com/reports

ON FT.COM

France madereform of theinternationalmonetarysystem acentrepieceof its G20 presidency,recognising how importantthis could be for addressingglobal imbalances, writesClaire Jones (pictured). Butreform has slipped down theagenda, which has much to dowith the eurozone crisis. Oneobserver says there has beena lack of intellectualleadership. For the full story,and a look at what is next forinternational monetary reformwith Mexico taking on thepresidency next year, go towww.ft.com/g20­2011

Strauss­Kahn: added toseveral initiatives

FINANCIAL TIMES THURSDAY NOVEMBER 3 2011 ★ 3

G20 Summit

In the months leadingup to the Group of 20nations meeting inCannes, global bank-

ing executives havemounted a furious attackon the Basel III reformsthat will force their institu-tions to hold more capitaland liquid assets.

They single out thecapital surcharge for “glo-bal systemically importantfinancial institutions”(GSifis), which is on theagenda for formal endorse-ment by the G20. It will,they say, hobble alreadyfragile economic growthand force the 28 to 30 larg-est and most interconnectedbanks to shrink their lend-ing to the world economy.

“There is an acute dangerthat the pursuit of financialstability imposes too great acost on economic growthand job creation at a fragiletime for the world econ-omy,” Peter Sands, chiefexecutive of Standard Char-tered said in September ashe unveiled an industrystudy that emphasised thepotential cost of the regula-tions.

Regulators, meanwhile,want the G20 politicians toendorse not only their capi-tal regime but also theirplans to force banks towrite their own “livingwills” that would make iteasier to break up or shutdown failing institutions.

Without a global frame-work for handling cross-border bank failures, theworld economy is still vul-nerable to a repeat of thedisastrous 2008 collapse ofLehman Brothers.

Lord Turner, chairman ofthe UK Financial Services

Authority, said recently:“We are committed, in theUK and globally, to puttinga stop to ‘too big to fail’status, with resolution toolswhich can deal smoothlywith the failure of a bankhowever large.”

So far, signs point to aG20 endorsement of boththe “GSifi” surcharge andthe resolution framework,but it is not at all clearwhat that rhetoric willmean in practice.

Recent history suggeststhat national interests –both in protecting localchampions and in wooingoverseas business – tend toreassert themselves whenthe G20 leaders go home.

Agreements reached atprior summits on raisingbank capital requirements,tying banker pay to riskand taming over-the-counter derivatives, haveall become snarled in localissues during the implemen-tation phase.

Steve Culp, global manag-ing director of Accenture’srisk management practice,says: “In many ways, the2009 London G20 markedthe high-water point forcollaboration across theglobal political, industryand regulatory agendas.

“Since that event, localand national agendas havetaken precedence over acommon and consistent setof global rules.”

While many of the effortsare aimed at furthering theagreements, the actualdetails often conflict, caus-ing confusion and raisingpotential costs for theindustry.

The European Union isdrafting laws on bank capi-tal, derivatives trading,credit rating agencies and ahost of other measures,while the US is draftingmore than 100 rules, manyof them on similar subjects,to implement its Dodd-Frank reform law.

David Holcombe, special-ist in trading at Rule Finan-cial business and technol-ogy consultancy, says: “The

barrage of reforms and reg-ulations is being applied dif-ferently by the variousregional and national regu-lators.

“This extraterritoriality isresulting in a disjointedapproach to improvingtransparency and reducingrisk across financial serv-ices, globally.

He adds: “This encour-ages regulatory arbitrage.The jurisdiction thatenforces the first or mostnegative set of rules willdrive participants else-

where, which in the longterm is damaging to anymarket that needs multipletypes of investors with dif-ferent investment hori-zons.”

Research by Accentureshows that more than 150pieces of global or domesticfinancial services regula-

tions are being writtenright now on top of the USDodd-Frank process.

In some ways, this wasonly to be expected, giventhe different national priori-ties. The US, UK and Swit-zerland are especiallyfocused on preventing arepeat of the crisis, butother countries have differ-ent goals.

Tim Kirk, head of finan-cial services at BDO, a con-sultancy, says: “While glo-bal consistency is provingmore challenging than gov-ernments and regulatorsmay have expected, indus-try practitioners are muchless surprised . . .

“Some governments placedifferent priority on attract-ing business and being seenas a competitive place to dobusiness as opposed to evertighter regulatory stand-ards and the higher coststhese bring.”

The continuing crisis inthe eurozone and falteringeconomies worldwide havealso damped enthusiasm fortough reform.

Giles Williams, co-head ofKPMG’s Regulatory Centreof Excellence in Europe,says: “The recognition thatbank lending is crucial to

Banks and regulators at oddsFinancial servicesBrooke Mastersfinds the debateover Basel III andother new rulesis heating up

Peter Sands of Standard Chartered: warned of risks from chasing financial stability Getty

stimulating the global econ-omy is putting significantpressure on the financialstability policy objectives.The politicians face a realconundrum that too muchsafety could lead to furthereconomic contraction.”

Bankers, meanwhile, arerethinking which businesslines will still be profitableunder the new regimes andare warning that someactivities – including lend-ing – could become muchmore expensive.

Patricia Jackson of Ernst& Young, says: “There is nodoubt that the combinationof higher capital, leveragerestrictions and liquiditybuffers is putting pressureon the industry.”

These pressures are likelyto make it hard for the G20to decide what to do next.

With global regulatorygroups such as the BaselCommittee on BankingSupervision (author of theBasel III reforms) and theFinancial Stability Boardfocused on implementationand ensuring level playingfields and the bankingindustry struggling torethink its business models,where should politiciansput their energy?

Barbara Ridpath, chiefexecutive of the Interna-tional Centre for FinancialRegulation, a think tank,has a partial answer.

“It’s critical that G20 lead-ers recognise the role ofsecurities markets in rais-ing finance for companiesto grow, and providing

long-term investmentreturns for investors andsavers . . . They have got tokeep their ‘eye on the prize’of how good regulation cansupport growth,” she says.

Former regulator CliffordSmout, now with Deloitte,has another prediction. Hesays: “On the whole, discus-

sion has been on the pru-dential side . . . It hasn’treally moved on to considerconsumer protection.

“But if you look at theUS, UK and EU, that isclearly part of the issue.That may be a theme thatcomes to the fore over thelong term.” he says.

The eurozonecrisis and falteringeconomieshave dampedenthusiasm fortough reform

contagion spreading fromGreece to other eurozoneeconomies and medium-term reforms to the govern-ance of the eurozone to pre-vent a recurrence of fiscaland trade imbalanceswithin the zone.

The enhanced EuropeanFinancial Stability Facilitywill have two elements in apackage with more than€1,000bn of firepower: lim-ited insurance for sovereigndebt of peripheral countriesand a new leveraged fundto buy debt outright.

Underpinning the detailsis the idea that medium-term German and Frenchfinance for peripheral euro-zone countries will be bal-anced by German andFrench control of economicpolicy across the eurozone,in what Angela Merkel,German Chancellor, euphe-mistically calls a “stabilityunion”.

Once these elements of apackage are agreed, theFrench hosts hope that non-eurozone countries willboost the credibility of theplan at the G20, eitherthrough additional bilateralor IMF support. The aimwould be to provide over-whelming firepower behindthe eurozone and stop trad-ers betting on a eurozonebreak-up.

G20 finance ministersmade clear in Paris thatsuch a deal was a possibil-ity, though it is far from acertainty in Cannes.

Speaking in a similar veinto many non-eurozonefinance ministers, TimGeithner, US treasury secre-tary, said: ”The IMF has asubstantial arsenal of finan-cial resources, and wewould support further useof those resources to sup-plement a comprehensive,well-designed Europeanstrategy alongside a moresubstantial commitment ofEuropean resources.”

In contrast to hastilydevised plans to defuse theeurozone crisis, the G20’sprogress in reducing global

imbalances inches forwardat glacial speed. The addeddifficulty, as Mr Levittemakes clear, is that unlikein 2009, there is no unifyingtheme for action needed tofoster a stronger and morebalanced global economy.

He says: “The messagefrom Cannes will have to bemore diverse; some nationsneed to focus on measuresto boost their economy,others on consolidatingtheir public finances, andstill others on rebalancingtheir economic models topromote domestic consump-tion.”

On past experience, gain-ing agreement on generalthemes and objectives willbe easier than specificchanges in domestic poli-cies of any G20 member.

In addition, France is stillkeen to be seen to havemade some progress onMr Sarkozy’s originalambitions for the 2011G20 agenda on reformingthe international monetarysystem.

It is expecting specificagreements on rules gov-erning the management ofinternational capital flows –allowing countries in lim-ited circumstances toimpose capital controls.

France also hopes toincrease the range of IMFcredit lines available tohelp well managed coun-tries that are exposed in acrisis, co-ordinating theseflows with those of Europeand Asia.

And it hopes to continuediscussion on exchangerates, particularly that ofthe renminbi, although itacknowledges there will beno breakthrough in Cannes.

But the problem for worldeconomic governance isthat it still faces a deep col-lective action problem.

Policy changes thatwould foster the commongood are seen as counter toindividual countries’ domes-tic interests. This obstaclehas forced France to scaleback its longer-term ambi-tions for Cannes.

The potential for the sum-mit to make progress infighting the immediateeurozone crisis is thereforesomething of a boon for MrSarkozy as he prepares forCannes. Without the crisis,the potential achievementsof the summit were lookingextremely limited.

Global leadersunder pressureContinued from Page 1

The IMF hasa substantialarsenal ofresources,says TimGeithner

4 ★ FINANCIAL TIMES THURSDAY NOVEMBER 3 2011

G20 Summit

As the eurozone sovereigndebt crisis has escalatedover the past 18 months,France has had to deal withan uncomfortable truth: itsroom for manoeuvre in thetortured series of negotia-tions over successive rescueplans was limited by therelative weakness of itsown fiscal and economiccircumstances.

The country is one ofonly six members of theeurozone with a triple Arating on its sovereign debt(along with Germany, theNetherlands, Austria, Fin-land and Luxembourg). Itremains a major force inthe European economy,with an impressive line-upof multinational companies.

President Nicolas Sar-kozy’s centre-right govern-ment, in power since 2007,has been committed to aprogramme of structuralreform and is doggedlychipping away at thebudget deficit in an attemptto reduce the size of thepublic sector and give along-term stimulus to theeconomy.

But France continues tobe constrained by heavy fis-cal pressures and feeblegrowth. That, along withworries about the exposureof its banks to risky euro-zone sovereign debt, hascramped its scope for sup-porting eurozone bail-outplans and raised questionsover the sustainability of itstriple A rating.

Behind this lies a deeperworry over weakeningcompetitiveness, especiallyagainst Germany. Since themid-2000s, France hasslipped behind its neigh-bour in terms of its per-formance on growth, exportmarket share and employ-ment.

In the short term, thegovernment’s top priority isto bring down the budgetdeficit, set to hit 5.7 percent of gross domestic prod-uct this year, to a target of3 per cent in 2013 – and toconverge on a balancedbudget in the years beyond.

This would enable it tocontrol a sharp rise in thepublic debt, which, underthe current programme,will peak at more than 87per cent of GDP next year.

It is doing so through aseries of austerity measuresthat have encompassed

everything from increasedtaxes on the rich, new taxeson sweetened soft drinksand the axing of 10,000 offi-cial cars.

It is trying to do thiswithout damaging whatlittle growth there is inthe economy, preservingtax breaks such as reducedVAT on restaurants andpreserving subsidies forresearch and development.

“In an environment of rel-atively low economicgrowth combined with highpublic debt, the challenge isfor the government to bal-ance fiscal consolidationand growth-enhancing eco-nomic policy measures,”said Moody’s, the US ratingagency, in its latest reporton France.

The agency concluded bywarning that it might cutits outlook on France’s tri-ple A from stable to nega-tive if the eurozone crisiswere to cause the situationto deteriorate over the nextthree months.

Circumstances are cer-tainly not getting any eas-ier: the government hasacknowledged its forecast of1.75 per cent growth nextyear is too optimistic and itis set to reduce the estimatecloser to consensus fore-casts of about 1 per cent.

That will require furtherausterity measures to keepthe budget deficit reductionon target.

Despite the fact that MrSarkozy faces a presidentialelection next April, he isdetermined to make a vir-tue of reforming the publicfinances as part of a widerplan to increase growthpotential.

He does not like his min-isters to use the words “rig-our” or “austerity”, butthey are open about thedrive to reverse a period ofmore than 30 years inwhich public finances havebeen in deficit.

This has culminated indebt servicing becoming thesingle largest expenditurein the budget, reaching€48.8bn next year. However,another statistic from the

budget projections indicatesa potentially importantturning point, as the gov-ernment’s efforts to beardown on public expendituretake hold.

This year, the size of pub-lic spending as a proportionof GDP – one of the highestin Europe – will fall to 56.3per cent from 56.6 per centin 2010. It will fall to below56 per cent next year andcontinue to decline if cur-rent policies are held inplace.

That is much higher than,for example, that of Ger-many, the usual comparatorfor the competitiveness ofthe French economy.

Nevertheless, ValériePécresse, the budget minis-ter, insists it is a “historicchange”. She declared inthe National Assembly:“This has not happenedsince 1945 and it is [thisgovernment] that will putan end to the continualincrease in spending by thestate.”

Mr Sarkozy has been criti-cised for not pushingharder on structuralreforms, but the reversal ofthe hitherto relentlessincrease in the state’s shareof the economy is helped byimportant measures takenduring his tenure.

The minimum pensionage has been raised from 60to 62 and the age for receiv-ing a full pension is beingraised from 65 to 67. A pro-gramme of not replacingone in every two retiringpublic servants has led to areduction in public sectoremployment of 150,000 overfive years.

Concerns remain – widelyexpressed by the privatesector – over things thatundermine competitiveness.These include very highcosts imposed on employ-ment where, again, Francehas fallen out of step withGermany.

Another factor is a per-ceived shortage of privatecapital for business, with aweak infrastructure of pen-sion and other investmentfunds willing to financegrowing companies.

But the private sectordoes take some comfortfrom what it sees as a grow-ing consensus on the needfor a serious reduction inpublic indebtedness and arecognition of the need tostimulate more private sec-tor employment.

“The idea of implement-ing serious reforms toobtain real fiscal consolida-tion is accepted, even in the[recent] debate among thesocialist presidential candi-dates. We are makingprogress,” says LaurenceParisot, head of Medef, theemployers’ federation.

Hope is to cut whilestill fostering growthFrench economyConcrete steps arefinally being takento reduce publicspending, reportsHugh Carnegy

Cannes loves putting ona show. The FrenchRiviera resort doesexactly that every year,

with what has become, since1946, the world’s mostprestigious film festival. Sohosting the latest G20 summitis the sort of big internationalevent the city can take in itsstride.

Of course some of its 80,000or so local residents willinevitably complain of thedisruption the G20 willprovoke, with all its securitymeasures and motorcades ofheads of states and theirentourages.

After all, this is a time ofyear when the city, with itspromenade (the“Croisette”), itsgrand hotels andcasino, itsmarina stuffedwith fancyyachts, itsmarkets andsmart shops,becomesratherpleasantlyquiet yetstill sunnyafter thehustle andbustle of thesummerseason.

But then

Cannes is no longer theexclusive winter resort ofthe old British aristocracythat flocked to the Rivieraafter Henry Brougham, the lordchancellor of Great Britain,discovered this sleepyMediterranean fishingvillage in the 1860s and putit firmly on the high societymap.

Later, American literati,including the writer ScottFitzgerald, made Cannes andits immediate surroundingseven more fashionable andfamous.

These days, the city relies onits film festival, boat show andother big events andconventions to keep its

economy, which reliesmainly on tourism,

turning all year.The touristseason has nowshifted fromwinter tosummer, butCannes’ goodtransportfacilities –the busyinternationalairport atNice is closeby and highspeed TGV

trains serveits station –

have made itan attractive

convention centrecompeting with its

much bigger

neighbour Nice and, a littlefurther down the coast,Monaco.

The seaside city also serves ahigh-technology cluster in theneighbourhood, even thoughthe Sophia Antipolistechnopolis has never reallylived up to its early ambitionsof becoming a French SiliconValley.

But Cannes can boast a rolein the European space industrywith the headquarters of theFranco-Italian Thales Aleniaspace venture a few miles awayat Mandelieu. It is one of

Europe’s leading satellitemanufacturers.

Cannes’ balmy climate –tender indeed are its nights, asScott Fitzgerald noted – andprivileged position have alsomade it increasingly popularwith French and Europeanretirees, helping to prop uplocal property prices evenduring the current economicdownturn.

This, together with thegrowing appetite for holidayhomes has inevitably urbanisedthe coast transforming it,sadly, for those who knew it

before the steady propertydevelopment and expansion ofrecent years, into one longsuburban strip from Nice toCannes and beyond.

Even the hills in thehinterlands are scattered withhousing developments andholiday residences.

Lord Brougham, whobuilt the first of the grandold villas of Cannes (theVilla Eleonor-Louise, namedafter his daughter), wouldcertainly be raising an eyebrowor two if he saw what moderndevelopment has done to his

once bucolic Riviera haven.Mercifully, the Carlton hotel

is still there, with its twindomes representing the breastsof the belle époque courtesanCaroline “la belle” Otero, andso are the other Croisettegrand watering holes – theMartinez, the Majestic and theGrand Hotel at the tip of theCap d’Antibes.

These hotels no doubt will beteeming with heads of state,their mandarins, centralbankers, ministers, securityguards and journalists duringthe summit.

It is undoubtedly occasionslike this that help maintain theprofile of Cannes and theRiviera at large on theinternational stage. It alsoseems appropriate thatPresident Nicolas Sarkozychose Cannes to host thepresent G20 meeting.

It is bound to provide asmuch drama and suspense asthe Cannes Film Festival itselfbut without, some may regret,quite the same colourful andfrivolous cocktail of glamour,gawpers, baubles, bangles andbeads. Yet you never know.

Riviera resort shows off its Cannes­do attitudeLocation profileThe seaside city has come a long way sinceBritish aristocrats put a sleepy fishing village onthe high society map, writes Paul Betts

Now and then: the seafront at Cannes and (inset) film stars parade in the street in 1947 Alamy, AFP/Getty

[This government]will put an end tothe continualincrease in spendingby the state’

Valérie Pécresse,Budget minister

Henry Brougham:discovered Cannesin the 1860s Getty