Will the G-20 Leaders Save the World?
The global economy is in free fall, gripped by what the International Monetary Fund calls theâ€œGreat Recession.â€ In a crisis that is unfolding everywhere at once, global trade and production are slumping, unemployment is soaring, pension funds are evaporating, big global banks are still teetering on the edge of insolvency (if they are not already insolvent), stock markets are cratering, and economic projections are being revised downwards on almost a weekly basis.
On April 2, the leaders of the G20 â€“ the most important 20 economies in the world â€“ will meet in London to follow up on their commitment in Washington last November to develop and implement a co-ordinated action plan to deal with this, the first truly global economic crisis.
It is hard to see how a serious debate, let alone a real global plan, could be developed over a dinner and and a day when several enormously important and complex issues are on the table for discussion and, perhaps, resolution. Accordingly, the communique should have been written by now .. but it does seem that a lot of issues are still in play.
The immediate source of the crisis was a reckless, out of control, casino kind of financial capitalism, which surely demands a new set of rules to govern global finance. Here there seems to be a tension between Europeans like Sarkozy and Merkel who want to put in place a much more stringent set of global rules while urgency and memory of the recent debacle still beckon, and residual defenders of â€œinnovativeâ€ financial markets who say the issue should be put off in order to deal with fixing the more and immediate problem of insolvent banks.
The lead G20 working group on financial regulation, jointly led by Canadaâ€™s own Tiff Macklem from the Department of Finance and ex Bank of Canada, seems likely to recommend some kind of loose international framework to oversee national financial regulators, perhaps co-ordinated through a beefed up IMF and other existing fora such as the Financial Stability Forum.
There seems to be an emerging consensus in favour of extending national regulation to the shadow banking system, turning the clock back to “plain vanilla” securities which are transparent and not unduly complex, requiring securities and derivatives originators to hold some securities rather than just distribute them, require disclosure of so called off balance sheet, over the counter derivatives trading, and developing a code of conduct for rating agencies.
Those who are looking for tough rules as opposed to loose guidelines, as well as limits and controls on financial sector compensation and major new powers for central banks and regulators to control future bubbles through credit controls are likely to be disappointed.
The issue of how to deal with insolvent banks is likely to be debated in London, but it seems unlikely that many countries will demand that Gordon Brown and President Obama nationalize much of the City of London and Wall Street … even though that is the course of action suggested by many close observers of recent financial crises who justifiably fear a global repetition of the extended Japanese deflation if zombie banks are allowed to stagger on. The Geidner Plan might yet work, though at enormous cost to US taxpayers.
When it comes to macro-economic issues, governments need to not only ensure that their commitments to a major, co ordinated stimulus package made in Washington last Fall are fully met, but also to redouble their efforts. The currently planned increase in government spending at a global level is not insignificant, but it is clearly inadequate given the ongoing collapse of global trade, business investment and consumer confidence. Even the Obama package is, the IMF reckons, too small to bring about a US recovery before late 2010.
Reports by the IMF suggest that the only really big stimulus packages are those of the US, China and Germany â€“ while the UK, France and Italy have done surprisingly little compared even to Canada (f you count the expected provincial contribution which is far from certain to appear.). Media reports suggest that the big European governments are strongly resisting doing more on the fiscal front out of fear of fast-rising public debt burdens. These fears may not be altogether unfounded â€“ the UK for one seems to be having trouble selling government bonds at low rates of interest.
The other European claim in the debate over stimulus is that their automatic stabilizers are much more potent than in the US, given the greater strength of social safety nets. Thatâ€™s true, but much of Europe, and Canada too, could do more to deliver on the promise of concerted fiscal actions made last November.
The priority for fiscal action around the world should be major job creating public investments in a new â€œgreenâ€ economy, in public infrastructure and in public services, as well as more generous income support for the real victims of this recession, literally millions of newly unemployed workers. One key weakness of IMF style calls for co-ordinated fiscal stimulus is that there has been no agreed focus on public investment and redistributive income transfers as opposed to tax cuts, even though most economists and even the IMF acknowledge that the former are much more potent in terms of GDP and job impacts.
Turning to monetary policy, interest rates have been slashed around the world since November, but the Euro area is still dragging its feet. Interest rates have not been cut here to just above zero, as they could and should be given looming deflation. One detects deep unease with â€œquantitative easingâ€ in the UK and the US out of unfounded fears of future inflation.
A key priority of the G20 should be to ensure better and more effective global economic governance moving forward. But at this point, the G20, which has virtually no institutional existence beyond a web site, also has no agreed future. It seems obvious that key global economic powers such as China and Brazil will have to be part of any viable policy process moving forward, but it is unclear what the G20 will have to say about the future of the G20. A worst case outcome would be the world goes back to being dictated to by the G7/G8 rich country club.
There seems to be a fair degree of support for a stronger role for the International Monetary Fund moving forward when it comes to financial regulation, macro economic co-ordination, and the traditional business of lending to economies in crisis. The IMF is clearly back in business after being actively avoided by developing countries ever since the Asian crisis which it bungled so badly. There are serious proposals on the table to give it billions more to lend to emerging economies in crisis (notably in central and Eastern Europe and the ex Soviet Union) and the IMF is promising to be kindler and gentler (while still demanding fiscal austerity as the price of redemption.
The IMF and other international organizations must be given much greater resources to deal with the impacts of the crisis on the worldâ€™s poor. But the IMF and other global institutions must surely be made much more representative and accountable. The emerging market economies in the G20 have little voting clout at the IMF, which still remains twinned at the hip to the G7 countries, especially the US Treasury Department. It seems unlikely that China for one will lend a big chunk of its reserves to global rescue packages if it does not have some real say in their disbursement.
And China is proving to be quite assertive in terms of staking some claim to setting the global rules. Just this week, it issued a statement calling for a new international reserve currency to replace the US dollar â€“ a move which can be read as a direct challenge to US global economic hegemony.
The G20 are unlikely to spend much time talking about global currency realignments as proposed by China and some progressive economists given strong US opposition, but the elephant in the room is the unanswered question of how the US will be able to fund multi trillion dollar fiscal deficits at close to zero interest rates, without triggering either a currency crisis, or inflation, or both.
New institutions also call for new thinking. Some G20 leaders, such as Lula of Brazil and Prime Minister Rudd of Australia, correctly see the roots of the current crisis in free market extremism, and are calling for a new economic model in which governments play a much greater role. They understand, for example, that the global economy cannot prosper if the wages of the worldâ€™s workers are stagnant, and the gains of higher productivity flow only to profits and corporate elites. President Obama has made similar noises â€“ but there will be more right wingers than progressives sitting around the G20 table next week.
All in all â€“ its going to be an interesting spectacle.