The Summit: Saving the Global Economy

The buildup to the G20 summit in Toronto promised a clash of titans. In one corner, the Europeans, backed by host Canada, fighting for a pledge to shrink government deficits and debts to meet hard targets. In the other, the United States, along with some key developing countries, battling for continued stimulus spending to shore up the unsteady global economic recovery. But the heavyweight bout failed to materialize at the summit table, though street protesters outside did their utmost to provide quite another sort of conflict. "It's a mistake," said British Prime Minister David Cameron as the G20 closed, "to think this summit has been about a different approach between the Americans and Europeans."

Skeptics could be forgiven for wondering if Cameron was merely trying to paper over divisions. Projecting an image of solidarity to financial markets, after all, was a summit imperative. But Canadian officials who were deeply immersed in preparation for the Toronto confab tell a story of months of intricate behind-the-scenes work to make sure it went off without rancour. For Prime Minister Stephen HARPER, one big challenge was defensive - preventing a bank tax - and another offensive - promoting deficit reduction. In the end, Harper's advisers could boast, without straying outside the bounds of acceptable political exaggeration, that he'd shaped the summit's outcomes on both issues.

His long route to claiming those bragging rights took some unpredictable turns. Along with the usual high-level meetings in Washington, a dogsled ride on Baffin Island by a future Japanese prime minister comes into the story. While the 2008 financial meltdown and 2009 recession set the process in motion, nobody foresaw the Greek debt crisis that finally drove it home. A British election changed the dynamic among the key leaders. As for Canada's efforts, the summit itself was a punctuation mark on a nine-month stretch when federal officials tried out new strategies for economic diplomacy in a world of increasingly flexible and varied political alliances.

The work started after last September's G20 summit in Pittsburgh, where U.S. President Barack Obama declared that the group, which brings together advanced countries with emerging powers like China, Brazil and Indonesia, would supplant the old G8 as the world's top economic forum. Forged in the heat of economic crisis, the G20 leaders acted with impressive unity last year to pump up stimulus spending, reform financial systems and swear off protectionist trade measures. But could that solidarity be converted into sustained action as the G20 planned for its next summit in Toronto? Could the G20 drive economic policy as the crisis abated?

Along with some other leaders, Harper hoped to shift from short-term stimulus spending to medium-term structural reform, especially action to rein in deficits. But almost before work on that front could get rolling, another divisive issue emerged. The longstanding club of G7 finance ministers - from the U.S., Japan, Germany, Britain, France, Italy and Canada - remains a powerful force. When they met in St. Andrews, Scotland, last November, then British prime minister Gordon Brown joined them to propose a global tax on banks. Like the U.S., the British government had to massively intervene to shore up its banks during the financial crisis, and Brown wanted a levy to pay for any future bailouts. Canadian Finance Minister Jim Flaherty objected immediately. "We are not in the business of raising taxes," he said, "we are in the business of lowering taxes in Canada."

So began a scramble by Canada to fend off a global tax on banks. Flaherty's department began building their case that such a levy was a bad idea on technical grounds. After all, banks in countries as diverse as Canada, India and Australia had held up fine. Smart regulation had shielded Toronto's banking hub, despite its close links to New York, ground zero for financial failure. As a senior Canadian official put it, "Canada was an inconvenient truth for Brown." Still, the British PM was joined by potent allies, Germany's Angela Merkel and France's Nicolas Sarkozy. The U.S. was also broadly sympathetic to the bank tax idea, although Washington didn't insist on it being imposed by all countries.

Within the confines of the old G8, that lineup of big powers might well have been unstoppable. Canada would have been able to appeal only to Russia, Italy and Japan. But in the new G20 constellation, the list of potential allies was much longer. Harper, who had earlier in his political career looked narrowly interested in relations with Washington and London, now found himself reaching far beyond the traditional anglosphere. Flaherty travelled, for example, to India to lock down anti-bank-tax support. Canadian officials cultivated the same sentiment in G20 countries from Brazil to Saudi Arabia.

The big test of this novel bid to build a coalition among advanced and emerging economies came when G20 finance ministers met in Washington for a key meeting in April. The troika of Brown, Merkel and Sarkozy had drawn even closer by then. Canadian officials had made headway, but they worried about "the extraordinary diplomatic resources" of Britain, Germany and France. But after the Europeans made their pitch, Flaherty bluntly voiced Canada's opposition. He was quickly backed up by finance ministers from Australia to Mexico, South Africa to Turkey. "All things are swinging Canada's way," said U.S. Treasury Secretary Tim Geithner, who jokingly linked Ottawa's bank-tax campaign to the Canadian hockey gold-medal win at the Vancouver Olympics.

From then on the air was leaking fast from the bank-tax proposal. In early May, Brown lost the British election and Cameron became prime minister in a coalition government. Cameron's Tories favoured a bank tax, too, but didn't insist that it must be adopted by the whole G20 for Britain to proceed. With the tax's original champion out of the picture, the danger, from Canada's perspective, looked defused well before the summit itself.

But by then a more urgent issue was dominating Europe's attention. In early May, European leaders agreed to provide nearly $1 trillion in a rescue package meant to ease mounting market fears about the huge debts of such countries as Greece, Portugal and Spain. The "sovereign debt" crisis, which had started with Greece stumbling toward default, was suddenly dominating the pre-summit buzz.

That fear injected fresh oomph into the deficit-control theme Harper wanted to push to the forefront. In the aftermath of the Greek scare, fiscal probity became a dominant G20 theme. "Greece brought into stark relief that this was not a theoretical issue," said a senior Canadian official. "It's a question of, 'Do you want to have the political choice imposed on you by markets, or are we going to take the choice to consolidate in advance?' " The Europeans, having just stared down the Greek crisis, didn't need convincing; Merkel and Brown were the new austerity hawks. Picking up on the new mood, Harper sent the G20 leaders a letter on June 18 suggesting they agree to halve their annual deficits by 2013 and stabilize or start shrinking their accumulated debts by 2016.

But his letter was quickly contrasted with a missive issued about the same time by Obama. "Our highest priority in Toronto," the U.S. President wrote, "must be to safeguard and strengthen the recovery." That apparent emphasis on maintaining stimulus seemed to contrast with the Canadian and European accent on cleaning up balance sheets. Yet Canadian officials claim they actually "breathed a sigh of relief" over Obama's letter. Although his short-term stimulus message garnered all the attention, they point out that he also cited his administration's "medium-term" plan to cut the U.S. deficit in half by 2013 and stabilize its debt level by 2016.

It's no coincidence that Obama's targets dovetailed precisely with Harper's proposal. For weeks, Canadian officials had been testing international waters to arrive at agreeable numbers. Other factors had to fall into place, though, for the whole package to fly. Japan posed a particular problem. Its deficits and debt are so high that Harper's targets are out of reach for any Japanese government. But Naoto Kan, who took over in early June as Japan's fifth prime minister inside four years, liked the direction, if not the numbers. As Japan's finance minister back in February, he had met with his G7 peers for meetings hosted by Flaherty in Iqaluit. Kan took a dogsled ride there, and reportedly also took to heart his counterparts' worried talk about Greece's emerging debt woes. Flaherty urged Kan and the rest to set "clear, consistent and credible" plans to improve their fiscal situations. By the time he arrived in Toronto, Kan had accepted special wording that allows Japan longer to reach the G20 targets, but with the same underlying goals.

With the fiscal aims widely agreed to in advance, and the bank tax more or less repudiated, the work in Toronto was largely around finessing the message. "That was the very legitimate U.S. concern," said a Canadian official who was inside the meetings. To signal to markets that governments wouldn't be sucking the life out of their economies all at once, the G20 communiqué declared that "strengthening the recovery is key" and committed governments to "follow through on delivering existing stimulus plans." Then came the new deficit and debt commitments. Obama tried to silence all the talk of a split between free-spending America and retrenching Europe by calling Cameron's recent emergency budget, with its tax hikes and spending cuts, "necessary courageous action."

As for Harper, his reputation on the international stage is at least temporarily enhanced. Sinking the bank tax required his government to foster a new-style global coalition. Selling the deficit targets called for some old-style manoeuvering between Washington and European capitals. If he can repeat either trick, or both, Harper might just be able to make that boost in his status stick, as a deft player of summit politics.

Maclean's July 19, 2010