Global economic governance: Europe's hard choice

Rebalancing act: as power shifts to emerging economies, the EU will find it harder to justify maintaining multiple seats in key global organisations. Photograph: European Communities, 2009

There had been fears that it was signal a loss of momentum. In the event, the G20 Summit in Pittsburgh started with a bang and ended up covering a lot of ground.

Earlier than expected, US President Barack Obama decided to reveal his preferences for the future outlook of global economic governance, putting on the table two issues that had been looming for a long time. The first is the recognition of the G20 as the permanent forum for international cooperation; the second, the reform of the International Monetary Fund (IMF) board.

These two issues are implicitly related. They both recognise that the balance of power needs to be tilted towards the new rising economies. Streamlining the "G process" – something President Obama had hinted at during this year’s G8 in Italy – and transferring responsibilities from the G8 to the G20 would imply a dilution of influence for some of the countries in the former grouping, in particular Italy and Canada, and to some extent Japan at the regional level.

Shifting the ownership of the IMF by five percentage points from industrialised to developing countries and cutting the number of directors from 24 to 20 would directly hit the main European economies – Germany, France and Britain, each of which has a director on the IMF board. In both cases, then, the loss in power would come from European nations, whose global economic weight has shrunk over the past two decades.

The US administration rightly acknowledges the urgency of addressing the representation of developing countries and adjusting the global balance of power. This, however, involves a shift – in a zero-sum game – from Europe to the developing world. Is Europe ready for this?

By disclosing his vision for global economic governance, President Obama, perhaps unintentionally, has put the ball in Europe’s court. It is now up to Europe to decide how to play. There is no easy way out: the larger European countries will eventually have to accept a rebalancing of power towards the developing world. But this could also be an opportunity for them to act together and to focus on Europe’s external representation.

As suggested in the Chatham House report ahead of the April 2009 London Summit, the best option for Europe is to propose the consolidation of the European seats on the IMF board into a single EU one with voting rights proportional to the size of the EU economy. The alternative – the stubborn defence of power – would be a long, messy business with no long-term benefits.