This is war

In 2001, the last time Italy held the Group of Seven (G-7) presidency, then-US Treasury Secretary Paul O'Neil's arrival for the meeting of finance ministers and Central Bank governors turned out to be an inauspicious international debut.

During a short layover in Germany en route to the meeting site in Sicily, O'Neil made a comment that was interpreted as a subtle shift in US monetary policy. By the time he landed in Palermo mere hours later, the dollar has slid nearly 3 percent against a basket of European currencies. O'Neil and other US officials spent the bulk of the meeting in damage control mode.

Current Treasury Secretary Timothy Geithner, who, like O'Neil, took office less than a month before flying to Italy, has already sent his own tremors through financial markets. On 10 February, markets judged his remarks about the US government's Wall Street bailout plan too short on specifics, and US stocks went into a tailspin. By the end of that trading day, the Dow Jones Industrial Average plummeted 380 points, or nearly 5 percent - its biggest one-day drop this year.

In that context, it might seem wise for Geithner and his team to avoid the potential for embarrassing gaffes and to treat the talks - on 13-14 February in Rome - like the kind of high-visibility get-acquainted session they usually are. But US officials have said that the stakes are too high for that.

The official word is that Geithner will push his counterparts from host Italy and Canada, France, Germany, Japan and the United Kingdom to take what he called "bold steps" to help pull the world's economy out of recession and prop up beleaguered financial institutions. The degree of boldness will determine the success or failure of the talks.

A new air of importance

France hosted the first summit of this kind - it was the G-6 at the time - in 1975, with Italy, Japan, the UK, US and West Germany at the table amidst another world recession, sparked then by the Arab oil crisis.

Since then, membership has grown to include Canada and Russia (which is still only an observer at the finance ministers' meetings) and it has faced more than three decades of economic ups and downs as well as an array of problems ranging from the end of the Cold War and the dissolution of the Soviet Union to the attacks of 9/11. But the meetings have never taken place in an economic climate as volatile as this one.

For years, the G-7 has been losing influence in economic matters to the larger G-20, which includes all the G-7 countries plus big emerging economies like Brazil, China, India and Mexico. In areas such as environmental policy, the G-8's influence has shifted toward multilateral organizations under the auspices of the United Nations. Trade has become discussed more effectively at the Paris-based Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO).

But current circumstances create an unusual level of importance for these talks. The eight countries to meet in Rome (counting Russia) have, according to the International Monetary Fund, a combined GDP of nearly US$40 trillion - almost twice as much as the rest of the world combined.

The group includes the seven largest donors to the UN's budget, and seven of the world's nine largest exporters. The countries are home to five of the world's seven riches stock exchanges, and almost all its active nuclear arsenal. They are leaders in innovation, military power and social influence.

But now, the group's limited membership can be an advantage. With agreement from a relatively small group of figures, countries can take steps to help calm markets in the short term while making dramatic reforms that will increase stability over time, such as improving transparency, shoring up credit markets and pursuing a path of coordinated policy efforts rather than retreating to protectionist positions. But it remains unclear if the political will to take such steps exists.

Good intentions

The group's track record is certainly less than impressive in terms of confronting big problems. The most likely outcome will be that participants in the finance ministers' talks will, when negotiations conclude, release a statement of vague policy goals and good intentions, but little real commitment to reform. If countries instead opt to try to use the platform for negotiating an agreement that favors narrow national interests rather than global economic health, the results could be far worse.

"Unfortunately, the political and economic situation makes the possibility for a spirit of collaboration less likely, not more likely," Alberto Mingardi from the Bruno Leoni Think Tank, told ISN Security Watch.

Most observers of the process agree.

The rotating G-8 presidency means more than hosting the finance ministers' meeting that will take place 13-14 February and the heads-of-state summit scheduled for this summer in Sardinia. Separate talks will take place between ministers of environment, energy, agriculture and foreign affairs. Side meetings are scheduled to discuss everything from policy dedicated to high technology to peacekeeping to foreign aid - more than a dozen meetings total. In all, the G-8's scope is more far-reaching and ambitious than that of the G-20, the OECD, the WTO or any UN agency. The question is: What can be done with that scope?

Leading up to the start of the G-8 "season," more than a dozen experts in various fields spoke to ISN Security Watch about their views on what the Italian presidency of the G-8 should accomplish. Each had specific suggestions related to their area of expertise, but the trend that emerged from most of the comments was to turn the world's economic turmoil into a long-term advantage by changing the rules of the game, leveraging the hundreds of billions of dollars being pumped into the world economy to assure that what emerges when the crisis is over will be better than what existed before it started.

Economic crisis as war?

In 1982, the late University of Maryland political scientist Mancur Olson argued in "The Rise and Decline of Nations" that economies in wealthy states, over time, inevitably became bogged down by over-regulation developed to benefit special interest groups. He used the example of unfair trade barriers erected to help a specific industry that ultimately hurt consumers by limiting choice and driving prices higher. But he could have just as easily discussed pro-Wall Street regulations in the US, or the power of trade unions or political parties in Europe.

Olson said that most attempts at reform were stillborn because the were opposed by the interest groups that benefited from the status quo, and that economies could break free from those tentacles only after a dramatic event, like a major war. He used the fact that two of the world's three largest economies - Japan and Germany - lost World War II to help make his case. They didn't become economic powers despite the war, he said, but rather because of it.

The challenge for the G-8 this year may be to be bold enough (to use Geithner's term) to treat the current crisis like a war. To create the political will to reinvent the world order, through bottom-up financial sector reform, using investments in energy to reduce the dependence on oil in favor of cleaner and more efficient fuel sources, improving mass transit, betting heavily on technology without over-regulating, and taking steps toward improving the fate of the world's poorest.

The order is a tall one. And the first sign of whether or not it will happen will emerge from Rome before Geithner and his counterparts head home.