What's the point of summits?

The year 2008 will be remembered as a year of great financial uncertainty: those with access to real-time trading data could watch the disappearance of billions of dollars of value in a matter of minutes, and speculate as to whether the whole financial system was at risk. Practically the entire population of the developed world has been affected, directly as investors or indirectly as consumers, savers or homeowners.

However, 2008 will be remembered not just for the crisis but for governments’ responses – in other words, as the year of many summits. For instance, in June leaders from oil consuming countries met with leaders of oil producing countries in Jeddah, Saudi Arabia to discuss the skyrocketing price of oil. The former blamed insufficient production; the latter blamed out-of-whack financial speculation. Yet high oil prices didn’t last, within a few months oil halved in value. This sent OPEC members scrambling to cut production, calling an extraordinary meeting weeks in advanced of a normally scheduled meet-and-greet.

When the financial crisis reached Europe following the collapse of Lehman Brothers, French President Nicolas Sarkozy called for a summit in Paris to formulate a common European response: which more or less left the financial clean-up to individual countries.  Once again on Sarkozy’s initiative, On November 15 leaders from the G20 -- the group representing the worlds 19 largest economies plus the European Union -- will meet in Washington to discuss the future of the global financial system in a 21st-century parallel to the mid 20th –century Bretton Woods talks. There, leaders will discuss the future of the IMF, as the decades-old institution has recently experienced a rebirth as faltering countries such as Iceland and Hungary seek its help. More importantly, leaders will discuss the future of regulation. On November 4 European finance ministers released an eleven-point plan for transformation the global financial system, prescribing a crackdown on light-tough supervision and regulatory ignorance.

The incidence of all these meetings, especially those with an overlapping remit, featuring the same individuals, raises an important question: what good do they do?

 Some may wonder why leaders can’t just pick up the phone and call. Or why can’t they just send emails? The answer lies in uncertainty. Prior to the financial crisis, market actors believed it was possible to effectively calculate risk and minimise uncertainty. This led to a proliferation of arm’s-length transactions, where knowing your counterparty didn’t seem to matter that much. In August 2007 when the bubble in the US housing market finally burst, markets moved to extreme uncertainty. Under conditions of uncertainty, proximity matters a lot more. Knowing with whom you are dealing matters. The same goes for political-economic relations and efforts to restore confidence in the markets. When nations were left to formulate crisis responses on their own, damage was wrought to the international system. A unilateral Irish bank guarantee forced other European countries to enter into like arrangements against their will. Crisis-hit New Zealand had its bank rescue policy virtually dictated by decisions over the Ditch in Australia. Iceland and Europe engaged in bitter disputes over bank deposits. It took co-ordinated action on liquidity and interest rates to halt vertiginous stock market falls this autumn.

Whether these particular G20 meetings will matter is less easy to answer. Unlike the first Bretton Woods, global economy is not coming out of a major world war, where millions died and whole economies collapsed, and the chance of utterly reworking the world financial system is much lower. It is important to remember that although the financial crisis is severe this time around, there is a great deal of financial architecture and financial practices that are not so easily conformed to some new mode of operation.