The G7’s power lies in its united economic diplomacy and shared dilemmas. In the face of Russia’s invasion of Ukraine and a more assertive China, putting this cohesiveness into action is more critical than ever
The G7 leaders’ summit in Hiroshima is shaping up to be one of the most important in years.
G7 summits, born amid the breakdown of the Bretton Woods system in the 1970s, turned into photo ops over the ensuing decades. Their importance was further demoted in the immediate wake of the global financial crisis in 2008, as the G20 rose to the fore.
The G7 no longer acts alone as the main driver for the global economy, given the growing role of emerging markets, especially that of China.
But on top of its still considerable economic clout, the underlying strength of the G7 has remained its general cohesiveness as a democratic grouping, supporting openness, the rule of law and the international order. With Russia’s Vladimir Putin’s barbaric behaviour against Ukraine and the rise of a more assertive China under Xi Jinping, the importance of reaffirming, underscoring and putting G7 cohesiveness into action is more critical than ever.
Three issues, epitomising this cohesiveness, may dominate the Hiroshima Summit’s headlines.
Three key issues
First, Russia’s heinous invasion of Ukraine has united the G7 and the West against Putin. Not only have these countries come together in providing Ukraine with the weaponry to fight Russia, but they have also joined on the economic front. Massive budget support has been disbursed to keep the Ukrainian government functioning without recourse to more money printing and inflation. The assets of Russia’s central bank and oligarchs have been frozen in a remarkable show of unity, and other financial sanctions have been deployed multilaterally. Europe is liberating itself from dependence on Russian energy, a perennial US/European sore spot.
The G7 should proudly tout these outstanding accomplishments and further pledge unity to counter Putin’s aggression. The leaders should discuss what more can be done on financial sanctions and the G7 oil price cap. They also need to intensify discussions about Ukraine’s reconstruction: How will it be organised? Who should lead? Should seized Russian assets be used? Given America’s dominance on military support, how will Europe lead on financing? And how can the private sector best be incentivised to help?
Second, the G7 and China. Xi’s growing statism, authoritarianism, greater bellicosity towards Taiwan and in the South China Sea, and his no-limits friendship with Putin, inter alia, underscore the strategic and national security challenges China poses. Despite US emphasis on seeing China as a strategic competitor, friend-shoring and so on, the US continues to import massively from China. Europe – especially Germany – has seen China as a source of demand and has been somewhat wary of following the United States. Meanwhile, the recent US cajoling of Japan and the Netherlands to restrict exports of advanced chip manufacturing equipment to China highlights growing western concerns.
Japan’s G7 presidency will certainly want an extensive dialogue about the threats China poses, how the G7 should balance strategic and economic considerations towards China, and how to further unite the G7. The Biden administration should strongly welcome this discussion.
Third, the global economy. G7 leaders must guard against optimism. Prospects are better than they were several months ago, given lower energy prices and declining inflation. Yet Russia’s war continues to weigh heavily on the global economy, especially poor countries, and global activity will be lower in the advanced economies this year relative to 2022. The outlook faces unknowns in how the US and European economies will respond to recent large central bank rate hikes, and although headline inflation is coming down, bringing it durably to central bank targets of 2% may be a protracted exercise. Geopolitical risks remain high. The leaders should focus on growing debt distress in low-income countries and selected emerging market economies, and what can be done to help them and how to bring China and the private sector to the table to provide debt relief. They will also focus on the transition to the green economy, which may cause some minor US/European hiccoughs about discriminatory features of Biden’s Inflation Reduction Act.
The G7 leaders’ plates will be full in Hiroshima, not just with sushi. They can be enormously proud of the G7’s renewed unity. But the road ahead is not any easier.