The Empire Club of Canada & The Canadian Club of Toronto

Notes for an Address by THE RIGHT HONOURABLE PAUL MARTIN  |  June 2nd, 2010

In three weeks the G20 will hold its fourth summit in less than two years.

It is good that it takes place in Canada whose initiative originally gave birth to the G20 as is attested to by the presence here of the three Canadian think-tanks who carried its banner in debates around the world over the last decade.

It is also significant that the South Korean Ambassador is here, for it is his country that will host next November’s summit, the first Asian country to do so, in what is a major step forward for the world’s new steering committee.

Finally, it is more than appropriate that the city of Toronto be the gathering place for the Canadian discussion.

The original G20 came into being as a result of the Asian Banking Crisis in the late 90’s. It rose to the leaders’ ambit a decade later because of another banking crisis, this time in the United States and Europe. Thus, where better to hold the next summit, than here in the home of Canada’s 5 largest banks, institutions which in themselves, and in the structure that regulates them, have become the models for others to follow.

It is fitting that Toronto is the city of choice for another reason as well. This is one of the world’s great multicultural cities. Almost half of its population was born abroad. Every day in Toronto’s parks and schools, the world meets and Canada’s identity is enriched. As someone said to me the other day: "How often is it that the host city is more diverse than the summit itself?"

It is also fitting, given that this will be the G20’s fourth meeting, and thus it begins its passage from adolescence to maturity, that today we discuss the measure by which its ongoing success should be judged.

My view is quite straightforward. Clearly, there are many issues on the table. Canada will raise the issue of maternal and children’s health at the G8, but for it to truly connect globally, it will have to be endorsed at the wider G20 meeting as well.

Others will point out that the question of global financial imbalances and the threat of contagion arising from the possibility of a sovereign debt default must be responded to, and of course they must be. In short, now and over the years to come, the issues the G20 will have to confront will be as varied as there are pebbles on the beach.

However, whether they will be successfully dealt with will depend on one thing. Bargaining will inevitably begin on the basis of the self-interest of nations. But in the end, success will only be achieved if the member countries grasp one truth – and that is, in today’s highly interdependent world, the furtherance of a country’s self-interest will depend more and more on the degree to which it furthers the global interest.

Therefore, what is the measure by which the G20 should be judged? The answer for those of us who pushed for its creation is the degree to which it improves the way globalization works and it is to this that I would address my remarks today.

Comment devrait-on juger la performance du G20? La réponse pour ceux d’entre-nous qui ont prôné sa création, est très claire. Il s’agit de voir s’il réussit à améliorer le fonctionnement de la mondialisation au moment présent, tout en préparant l’avenir. Et c’est de cela que j’aimerais vous parler aujourd’hui.

To illustrate this, what I’d like to do is to highlight three issues that are in the forefront of global concern as Canada and Korea set the agenda for this year’s meetings. They are: global poverty, climate change and the global banking crisis.

First, global poverty: it has many faces. Certainly one of the most incomprehensible in the modern age is the lack of food security-malnutrition and famine. Here the unmistakable warning sign, the canary in the coal mine as it were, occurred two years ago when the price of the world’s staples tripled and poor countries’ budgets were decimated as they struggled to import food and civil unrest spread throughout the developing world.

Nowhere was the threat more serious than in Africa. Yet, except for a slight bow in its direction, the G20 has virtually ignored the continent and the issue of food security. Africa’s leaders have much to answer for, but clearly the G20 must respond much more urgently than it has if it is to live up to the hopes so many have vested in it.

Next, climate change. On most questions, what is important are the signals the G20 sends to the world’s negotiating tables. In the case of climate change, this meant Copenhagen where, suffice it to say, the wrong signals were clearly sent.

Of course, the prime responsibility for CO2 emissions lies with North America and Europe. However, this does not mean that all of the G20 members as their emissions increase, do not have a responsibility to Bangladesh, the Philippines, Central America and Africa regions of the world that are virtually innocent of the causes of climate change and yet whose poor will bear the ―greatest cost‖ in terms of creeping deserts, flooding and famine.

The next climate change meeting will be held in Mexico next November-December. However, before then, there will be the two G20 summits. It is crucial, therefore, that rather than a last minute confrontation between the US, China and a few others as in Denmark, that the G20 in June send out the proper signals now so that the climate change meeting has a chance to succeed.

The world’s new steering committee came into being because the world has changed. Its members are members because they have power and position, but they also have responsibilities, responsibilities they must live up to. In short, G20 multilateralism must mean more than a camouflaged concern only for one’s own national interests.

This is true in the case of global poverty. It is true in the case of climate change, and it is every bit as true in the case of the next issue.

The fact is, despite all of our talk about globalization over the last 25 years, today’s financial crisis shows just how unprepared the world’s governments were, and still are, when faced with a global economy whose problems lie beyond the scope of purely national solutions.

This was not simply another economic downturn. It was one that mutated into a perfect storm because at its core was a banking crisis of unprecedented global reach and we cannot afford another one. To put it starkly, the great recession of 2008-9 has done its damage and indeed too many countries, of which Greece is only one, are now having to confront decimated balance sheets and none of them can afford to engage in their own deficit fight only to have it all unravel because of another global banking upheaval.

The great strength of the free market is its ability to innovate; its great weakness is the tendency every so often to take that innovation a bridge too far. Nowhere is that weakness more damaging than when it appears in the banking system, a system which depends almost entirely on the trust we repose in it.

That is why the moral hazard posed by institutions who violate that trust will eventually eat away at the very foundations of the free market, and that is why we must develop a protocol on how failing banks can be unwound without bringing down the whole global system. It is also why I agree with the Governor of the Bank of England who said: "if a Bank is too big to fail, it is too big".

This leads me to the third test I would cite as we judge the success of the G20: the need to remind global bankers of the principles of banking.

That is to say, while we must strengthen national regulation, we must recognize as well that it alone cannot deal with the gaps in the global financial system. Furthermore, we must accept that putting global principles and standards in place is but the first step, for these are going to have to be continuously reviewed by an international body whose only goal is the protection against systemic risk.

And, finally, the new standards are going to be mandatory and fully enforced. Why? Because in a world of seamless capital markets there are no borders, and if those are the rules the bankers play by, then those must be the rules the referees referee by as well.

When the memories of the current banking crisis begin to fade, the cities of London and New York will not be alone in seeking to lower, if not to gut, regulatory constraints to attract the world’s financiers. Already Paris, Frankfurt, Singapore and Tokyo are gearing up for the next round.

And, of course, this is but the tip of the iceberg. Wait until Hong Kong and Shanghai combine to challenge the incumbents. Then the battle will really be on!

The fact is, given the difficulty major US and European bankers now appear to have remembering how remorseful they were but a couple of months ago, it should be pretty clear that a voluntary process of global coordination will lead nowhere. In short, if there is anyone who thinks that the voluntary subscription to global standards will be sufficient, then I’d like to introduce them to the tooth fairy!

So where do things stand today? At the present time the G20 has not come down on the single most important issue it has to deal with – the core equity, liquidity and leverage standards for G20 banks themselves.

The issue here is pretty straightforward. In most cases, banks insist that you put up a certain amount of equity or that you have an ascertainable net worth, when you borrow from them. No argument there!

The question is, why then do some banks think they should be the exception to that same rule when the shoe is on the other foot, that is to say when they borrow. The answer is there shouldn’t be any exceptions, but there were! And therein lies the root cause of today’s problem.

Why are core standards so essential for financial institutions? It is because while sound regulation is crucial, it is no panacea – In fact, nothing is! That is why what financial institutions need first and foremost is a solid foundation – an equity base that will allow for human lapse to the maximum extent possible, one that can withstand the ravages of greed or the unexpected.

In short, bankers, their shareholders, and creditors must understand that a system whereby financial institutions take excessive risks, earn excessive profits, and the world pays the bill for failure, is no longer acceptable.

Given the ever growing differences in approach both within and between the United States and Europe on the host of regulatory issues before them, it is clear that the most urgent need is for the G20 to confirm at its June meeting, that at the latest, the core equity and leverage standards will be in place by the early fall — that is to say, well before Korea, and that the other differences will be worked out in the immediate months (not years) that follow.

In short, the time for the G20 to draw the line in the sand is now. While the right words are being spoken, it is clear from the ongoing delays and incessant debates that not all of the G20 members or their banks are prepared to carry through. What the recalcitrant should remember however, is that the G20 is a global steering committee. It is not a small club of the self-interested, and the question to ask is not how do you keep New York, London or German bankers happy, it’s how do you keep the global economy healthy.

So, where does this leave us?

Où en sommes-nous maintenant?

I have touched on the litmus test for the G20 with reference to three examples. In each case, the jury remains out but the grounds for optimism are there. In each case however as well, there are two constants that cannot be ignored if the G20 is to succeed.

The first constant is the tradeoff between generations. This, of course, is most evident when addressing climate change. It should be every bit as evident when dealing with global poverty.

In 2050, Africa will have a population of 2 billion, 500 million more than either China or India at that time. Hopefully that massive percentage of young people by mid-century will provide the world with an engine of growth when the global economy needs it, comparable to the shot of adrenalin China is providing today.

However, if in 2050, Africa’s young are unemployed and rootless, millions desperate, with no hope but plenty of anger, then those young people will turn, as would so many in their circumstances, what could be the success story of the 21st century, into an unstoppable source of global instability, with all the misery that entails. The choice is ours, the consequences of that choice however will be borne by our grandchildren.

The second constant which is crucial to the success of the G20 is whether the leaders of the member countries show a capacity to rise above the political comfort of narrow nationalism.

Pour que la mondialisation réussisse, les grandes puissances doivent d’abord reconnaître que la protection de leur souveraineté ne passe plus par l’isolement mais plutôt par la coordination de leurs grandes politiques avec les autres pays du monde. Voilà la raison d’être du G20.

Quite simply, coming to grips with what it takes to make globalization work requires a global consensus that cannot be squared any longer with the traditional exercise of sovereignty.

To illustrate this, let me return to the issue of bank turmoil and the continuing discord between the UK, Germany and France, as to what to do about it, not to mention the parallel fractures within the US Congress, all of which has taken place as if the rest of the world didn’t exist.

The current definition of sovereignty was established in 1648 and it was all about rights and the parochialism of rigid borders. In case no one has noticed, the world has changed since then. Surely, if we have learned one thing from the financial crisis, it is that the definition of sovereignty must now include sovereign duties and the responsibility of nations to each other.

Clearly, if the G20 is to do its job, which in this case is to achieve the global coordination of national bank regulation, it is here in the evolution of the duties of sovereignty that the battle lines will be drawn, for with the designation of the G20 as the world’s new steering committee, the debate is no longer what will replace the G8, it is will the G20 be given the responsibility to make globalization work, but without the tools to do the job.

To those who argue as some still do that all of this is an attack on their sovereignty let me simply ask where they have been for the last couple of years. We are not talking here about infringing sovereignty, we’re talking about what is necessary to protect sovereignty in the 21st century.

For instance: when the US and European financial players created toxic assets and sold them around the world to everyone’s detriment, was that not an infringement on the rest of the world’s sovereignty? Is today’s global recession itself not partially the result of the infringement on the sovereignty of every country that has been affected by the failure of the European and American banking systems to exercise minimum standards of prudence?

And this is only the beginning. What has happened in Europe with the massive bailout of its illiquid, if not insolvent states, is but an example of how the unthinkable can become real. There, financial markets have already stripped away much of sovereignty’s economic veneer. If anyone doubts that, let them go to Greece, Spain or Portugal today. More and more the issue is are the markets going to dictate a country’s economic and social policy or are national governments going to recognize their duty to their own citizens to adhere to international norms, and to work with other countries, so that the fear of contagion ceases to be the sword of Damocles hanging over an increasingly integrated global system.

In the same vein, the discussion of sovereign duties becomes even more important when we look at how quickly the global landscape continues to change. What the European and American governments must come to grips with as they continue to argue among themselves, seemingly oblivious to the rest of the world, is the reality that in the years to come, when the Chinese and Indian economies have penetrated global markets even further and they stumble as all economies do, there will be no stimulus package big enough to rescue us – certainly not if we in the West hide behind outdated truisms or quick fixes now to frustrate the longer-term resolution of global issues while we have the opportunity to do so.

In the same context by the way, the Europeans might want to re-examine their conflicting proposals for a surtax on everyone’s banks. Quite simply, it flies in the face of today’s global reality.

The two biggest banks in the world are Chinese. They are both state-controlled. The same is true of the fastest growing banks in India, Brazil and the other emerging economies.

Taxing a state-owned bank is the same as transferring your small change from one pocket to another. Thus, the only institutions that would be truly touched by the tax would be the large investor owned banks of Europe and North America, who will eventually be competing with those same state-owned banks. Given this, you have to ask what will it take before the debt-ridden nations of the West realize how much the world has changed, more to the point just how much the balance of economic power in the world has shifted.

In any event, it is time for the debate on financial institution safety to be settled. It has gone on much too long.

The question revolves around the management of risk and the answer is evident. It lies in the establishment globally of the principles of sound regulation and greater transparency, principles that will only succeed if nations recognize their duties to each other.

This is why the G20’s time has come and it is also why Canada’s role as host of this June’s meeting is so critical. The host of a summit is in a powerful position, for if it chooses, it can influence much of the agenda.

We will not host another one for a generation. Let us not miss the opportunity before us.

Few countries have our fiscal credibility. Few countries have our reputation for sound regulation and high banking standards. It is our officials who have led the debate ever since the Asian crisis.

Therefore, irritating as the bank tax proposals may be for instance, Canada’s representatives should not be diverted into spending all their public time speaking about what the G20 must not do, they should speak unequivocally and with force about what it must do!

This is true in terms of bank regulation, but it is also true in terms of climate change, especially when the President of Mexico, whose country is trying to rekindle the momentum lost after Copenhagen, came to Canada only a week ago and asked us to show the requisite leadership. It is true as well in terms of food security in a world where in the last few years the number of people who go to bed hungry has increased by over 200 million, most of them children. It is because of them that we must never forget that the members of the G20 are not there to speak only for themselves, but also for the 173 countries who are NOT at the G20 table.

In summary then, let me conclude with the reminder that the future of globalization is the great issue of our time. The issues we have discussed here are all manifestations of the need to make it work better. Even more to the point how the G20 deals with them will provide an indication of how it will deal across the board with the interdependence of states in the future.

The question the G20 has to answer is, now that there will be not one or two, but for the first time in our lives, five or six giant economies at the table, what is it we must do to ensure that this works to everyone’s benefit.

This is why it is fortuitous that the G20 meetings this year are in Canada and Korea. Two wealthy countries, but neither a superpower. Neither with a domestic market large enough to fall back on. Both dependant on a world that works.

What both must do as the agenda setters of their respective summits is to use their history, their experience to challenge the larger economies, to bring them to the realization that they too are dependent on global solutions to national problems, that the line between the national interest and the global interest is getting grayer and grayer, that sovereignty is no longer only a question of rights, but of duties as well.

The opportunity is there for Canada and Korea to show the way.

Let us hope they do!

Thank you!