EDITORIAL: What role for the G-7?

Finance ministers and central bank governors of the Group of Seven (G-7) industrialized nations held their annual meeting last weekend in Iqaluit, an Arctic outpost in Canada.

The tiny port town was selected in an effort to offer a more casual setting. The idea was to steer the forum away from the formalities that have undermined its effectiveness and ensure candid and informal discussions would be held.

The biggest crisis facing the world economy since the Great Depression in the 1930s has dramatically changed the global economic and financial landscapes.

At a summit meeting of the Group of 20 nations held last September in Pittsburgh, Pennsylvania, world leaders designated the G-20 as "the premier forum" for discussions on international economic issues.

The clout and importance of the G-7 have waned. Before the meeting in Canada, the seven nations agreed to forgo issuing a formal communique for the first time in 12 years.

But the G-7's plan to focus on the basic role of the forum was shaken by a global stock market retreat. Stock markets around the world tumbled after an auction of Portuguese government bonds went poorly.

The poor auction rattled market confidence in the stability of the entire European Union, some of whose members were facing a debt crisis on the scale of that confronted by Greece. The euro also fell sharply.

In New York, the Dow Jones industrial average sank below 10,000. The Tokyo stock market also slid.

The stock market sell-off was also fueled by speculation that China may tighten its monetary policy due to Beijing's concerns about financial bubbles. Concern about the effect of tighter financial regulation recently announced by the U.S. administration of President Barack Obama was also to blame.

A confluence of factors with huge implications for the future of the world economy is at play here.

But the chairman's statement at the end of the G-7 gathering offered no clear message for solving the troubling situation. The statement focused mainly on agreements reached in previous meetings, such as continuing economic stimulus measures to support the recovery of the world economy and paying attention to fiscal sustainability.

The G-7 officials agreed to continue their regular meetings under a more informal format. Their lukewarm response to the fresh market turmoil reflects the declining power of the forum.

As for the debt woes in Greece and some other European countries, however, the G-7 had no choice but to rely on the European Union to deal with the situation. Clearly, the group found it difficult to reach any decision on the problem.

The seven richest nations also find it difficult to have detailed discussions on issues that concern China without having representatives from Beijing on hand. These limitations will keep hampering international efforts to tackle challenges facing the world economy under the G-7 framework.

What kind of role, then, can the forum possibly perform despite these limitations in this new era of the G-20? It is impossible to provide a definite answer to the question immediately. But the forum may find a new mission for itself in helping to develop a new global financial order that is better equipped to prevent a financial crisis.

At last week's meeting, the United States explained the new approach to financial regulation proposed by the Obama administration. The proposal is designed to prevent a recurrence of the current crisis by enforcing a complete separation between commercial banking and investment banking and prohibiting deposit-accepting banks from trading in risky financial products.

Both Europe and Japan expressed support for the U.S. plan, despite differences in their financial systems. The G-7 nations also agreed to make financial institutions rescued with taxpayer money to make full restitution.

The G-7, which started as the Group of Five, has been dealing with global financial markets for nearly four decades.

We hope the forum can serve as the driving force of the G-20 regime by exerting leadership in laying out a vision for the world economy and proposing new frameworks to tackle relevant challenges rather than limiting itself to policy coordination to secure currency stability and rectify imbalances.

--The Asahi Shimbun, Feb. 9