Blog Post

A Modest Proposal for the G20

Soon the G20 group will meet again to continue its discussion of changes in the rules governing the international economy and the global, financial system. A danger is that, as time passes and as the world moves further away from the deepest point of the recent financial crisis, inertia will set in, lobbies will reacquire […]

By: Date: June 20, 2010 Topic: Global Economics & Governance

Soon the G20 group will meet again to continue its discussion of changes in the rules governing the international economy and the global, financial system. A danger is that, as time passes and as the world moves further away from the deepest point of the recent financial crisis, inertia will set in, lobbies will reacquire their past influence on legislators and other policymakers, and national interests will again prevail over global interests. These developments will inevitably affect the countries’ willingness to establish clear and widely shared rules to guide future financial operations and operators.

Many issues continue to characterize the ongoing debate. Among these, the following are significant ones:
(a) Should the focus be on micro, institution‐specific risks or on macro‐prudential risks? Depending on the focus, different policy tools would be needed.
(b) Should the regulators and the regulations remain nationally based? Or should they become more global character?
(c) If they remain national, how much harmonization of the rules is necessary among the countries for a financial market that is global in scope and that can thus exploit regulatory arbitrage?
(d) If the rules and the regulators remain national, how much exchange of information would be necessary among the regulators?
(e) What should be the reporting requirements for those who operate in the market? And to whom should they report?
(f) Which financial operations should be registered and/or would be required to use transparent and monitored channels?
(g) What should be the capital requirements for loan‐making institutions, or for those that, through their operations, acquire large, potential, financial liabilities? How to make these capital requirements not contributors to cycles?

These and other questions need to be addressed in the development of new rules that would hopefully reduce the probability of financial crises in future years. An old issue that will inevitably arise in the discussions is whether countries that participate in the G20 meetings should try to agree on precise rules. Or, whether it would not be preferable to focus on the development of broader principles that could provide an umbrella for determining proper behavior in the financial market. Obviously, the existence of principles would not eliminate the need to develop (within specific countries) more detailed rules that could complement the principles. As an example, the principle that states that those who drive cars have the responsibility to drive carefully does not eliminate the need to have speed limits (rules) that could be different from place to place.

With some generalization it can be argued that Americans and generally those from Anglo‐Saxon countries have preferred to have specific rules for what is called a ‘rule‐based society”. In these societies lawyers have acquired great importance because they are those who often make the rules and determine whether the legal rules are followed. The main argument in favor of a rule‐based society is that precise, agreed rules reduce political and administrative discretion. This is a strong and important argument. I recall that during the 1997‐98 financial crisis, that hit several of the countries of Southeast Asia, high level representatives of the US Treasury kept repeating ad nauseam that the crisis had occurred because of the absence of specific rules in the affected countries. If those countries had had American‐style rules, they would not have had the crisis.

Continental European countries have relied a bit less on precise rules and a bit more on broader principles to guide behavior in the financial market and in other activities, including driving. An important argument for this preference, and one that has acquired more weight due to the recent financial crisis, is that, just as happened with the famous Maginot Line, before World War One, precise rules tend to deal with the situations of the past (past wars or past crises) and not with the reality of the present and future. In a fast developing world, in which technology and other relevant areas are changing rapidly, thus continually creating new situations, new institutions, new relations, and new financial instruments, existing and precise rules tend to become inadequate in dealing with new situations, because they were developed with the needs of the past. In a rule‐based world, rules tend to follow, rather than anticipate, real world changes. Another argument, stressed by pronouncements from the Vatican, is that unethical behavior, as distinguished from illegal behavior, is difficult to be dealt with by precise rules.

The recent financial crisis has driven home the fact that some financial operations considered unethical by most observers may not have violated any existing rules. Thus, the perpetrators could not be penalized and they could keep their gains. There have been many examples of this problem.

The criticism of some of Goldman Sachs’ operations, of rating agencies, and of other operators was clearly the result of this divergence between what the rules allowed and what was considered ethically correct behavior by much of the population. If the existing rules had been complemented by some relevant, broad principles, there might have been fewer problems.

Perhaps, an example from India may help clarify the point made above. In a strict, rule‐based society, there is a sharp distinction between “tax evasion” and “tax avoidance”. Tax evasion occurs when one breaks a clearly identifiable norm or rule. That behavior is punishable by law. Tax avoidance occurs when a taxpayer uses some potential ambiguities in the fiscal norms to reduce the tax payment or to avoid paying taxes. Tax avoidance is generally not considered a violation of the law. In the USA and in several other countries, it is not legally punishable. At best the Internal Revenue Service or equivalent agencies bring (ex post) changes to the regulations or to the legislation to reduce future tax avoidance. However, in India this sharp distinction, between tax evasion and tax avoidance, is not legally accepted. The principle is that, if a special tax court decides that the intention of the taxpayer was to defraud the government of tax revenue, tax avoidance is treated as tax evasion.

Returning to the G20, it is not realistic to expect that a group of 20 heterogeneous countries, with different national interests and traditions, would be able to agree, at the next or at future meetings, on precise “rules governing the international economy and financial system”. However they might be more successful if they concentrated on developing a set of general but relevant principles, a kind of constitution, that could in turn influence the precise rules that the specific countries might want to follow. The rules might differ between countries, but the more they would follow the general principles, the greater global harmonization would take place. Obviously the principles should not be so general as to become meaningless. Calling for equality, fraternity and liberty would be an example of a useless principle. Calling for full transparency in all financial transactions would be a more useful principle.

The G20 could also agree on an institution ‐‐‐‐the IMF?‐‐‐‐ that might exercise some kind of surveillance function over countries to determine whether the ongoing behavior in their part of the financial market is consistent with the agreed principles.

This would clearly be a second‐ best option. However, this might be realistically the best that could be achieved.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event

Upcoming Event


Bruegel Annual Meetings 2019

Bruegel's 2019 Annual Meetings will be held on 4-5 September and feature the launch of Bruegel's Memos to the New European Commission.

Speakers: Lorenzo Bini Smaghi, Laurence Boone, Claire Bury, Vítor Constâncio, Zsolt Darvas, Jérôme Delpech, Kris Dekeyser, Maria Demertzis, Baroness Kishwer Falkner of Margravine, Alicia García-Herrero, Mikaela Gavas, Sven Giegold, José Manuel González-Páramo, Sylvie Goulard, Pierre Heilbronn, Mathew Heim, Jamie Heywood, Yi Huang, Danuta Hübner, Korbinian Ibel, Shada Islam, Kate Kalutkiewicz, Brigitte Knopf, Bernd Lange, Christian Leffler, Päivi Leino-Sandberg, Mark Leonard, Cecilia Malmström, Stefano Manservisi, J. Scott Marcus, Ann Mettler, Ashoka Mody, Erik F. Nielsen, Jean Pisani-Ferry, Lapo Pistelli, Lucrezia Reichlin, Joakim Reiter, André Sapir, Olaf Scholz, Harriet Sena Siaw-Boateng, Philipp Steinberg, Alexander Stubb, Ezequiel Szafir, Jean-Claude Trichet, Laura Tyson, Nicolas Véron, Reinhilde Veugelers, Sabine Weyand, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Palais des Academies, Rue Ducale 1, 1000 Brussels
Read article More on this topic More by this author


The Democrats need to have a climate-only TV debate. For Americans and for the rest of us

A series of global summits mean the months between now and November 2020 will be crucial to the future of climate change.

By: Simone Tagliapietra Topic: Global Economics & Governance Date: August 6, 2019
Read about event

Upcoming Event


China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author


The Coming Clash Between Climate and Trade

The new leaders of the European Union, who have relentlessly championed open markets, will, ironically, likely trigger a conflict between climate preservation and free trade. But this clash is unavoidable, and how Europe and the world manage it will help to determine the fate of globalisation, if not that of the climate.

By: Jean Pisani-Ferry Topic: Energy & Climate, Global Economics & Governance Date: August 1, 2019
Read article More on this topic More by this author


A reflection on the Mercosur agreement

The EU accepts the deal because it is worried about the catastrophic scenario of a world without the WTO.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 26, 2019
Read article More on this topic

Blog Post

China’s investment in Africa: What the data really says, and the implications for Europe

China has clearly signalled to Europe that it does not shy away from involvement in Africa, historically Europe’s area of influence. But the nature of China’s direct investment flows to the continent will have to change if they are to prove sustainable.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: July 22, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Read article More on this topic


What bond markets tell about China’s economy

Macro data doesn’t provide a comprehensive picture to investors, but bond issuance data can fill in some gaps.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: July 10, 2019
Read article Download PDF

Policy Brief

The threats to the European Union’s economic sovereignty

Memo to the High Representative of the Union for Foreign Affairs and Security Policy. The authors describe the current context and the increasing interlinkages between economics and power politics and the role to play in reinforcing and defending Europe’s economic sovereignty.

By: Jean Pisani-Ferry and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: July 4, 2019
Read article More on this topic More by this author


Farewell, flat world

In the last 50 years, the most important economic development has been the diminishing income gap between the richer and poorer countries. Now, there is a growing realisation that transformations in the global economy have been re-established centrally from intangible investments, to digital networks, to finance and exchange rates.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 2, 2019
Read article Download PDF More on this topic

Policy Contribution

Redefining Europe’s economic sovereignty

This Policy Contribution delves into the position of the EU in the current global order. China and the United States increasingly trying to gain geopolitical advantage using their economic might. The authors examine the specific problems that China and the US pose for European economic sovereignty, and consider how the EU and its member states can better protect European economic sovereignty.

By: Mark Leonard, Jean Pisani-Ferry, Elina Ribakova, Jeremy Shapiro and Guntram B. Wolff Topic: Global Economics & Governance Date: June 25, 2019
Read about event More on this topic

Past Event

Past Event

China’s investment in Africa: consequences for Europe

How is Chinese investment impacting Africa, and what could be the consequences for Europe?

Speakers: Solange Chatelard, Maria Demertzis, Alicia García-Herrero, Abraham Liu and Estelle Youssouffa Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2019
Load more posts