Jonathan Portes provides us with an articulate and elaborate presentation of the outcome of the G20 summit. This is the best that can be said about it, but is it the most appropriate as well? I don’t think so, but let me start with a disclaimer.
The G20 is plainly not the format for a replacement for the nearly defunct G8. Too many people around the table to internalise difficult decisions, lots of countries that have little to contribute in terms of resources and ideas make for posturing and an emphasis on communication rather than substance. In that sense, the summit achieved more than was expected. Congratulations, therefore, to Jonathan and his colleagues who worked so hard under such adverse conditions.
An historic recession calls for historic action
The world is in an historical recession, this is a platitude. Yet, this fact calls for historical action. First and foremost, we urgently need to get out of the recession. Central banks have done what they had to do. Interest rates are now at or close to the zero lower bound. Unconventional monetary policies are unlikely to do much more than flatten a bit the yield curves, too little to make a crucial difference.
More coordinated fiscal policy should have been agreed
Central bank independence has shown its precious value and mission has been accomplished, but this is not enough. So, yes, we are left with fiscal policies, and this is an absolute emergency situation. Some countries – the US, the UK, China and Japan – are doing a lot, the others are not. Coordination is essential because each government has good reasons to be concerned about raising their debts to finance more imports. Promises to do more later are helpful, but words are not enough and, given the lags of policy effects, the window of opportunity is closing fast. Going into the summit, we knew that many important countries had decided not to contribute their fair share of the collective effort, preferring to free ride in a sort of protectionist way. Grand statements notwithstanding, this is a failure.
Getting the banking system to work again was the other urgency. It has been at least a year that the profession has come to the conclusion that the solution is some form of debt-for-equity swap (see Bulow and Klemperer, Buiter, or Hall and Woodward). In plain words, toxic assets must be removed from bank balance sheets at a low enough price to protect the hapless taxpayers, which requires recapitalisation. We are not to choose between strengthening the asset side and strengthening the liability side. The two are linked by a simple identity and must be tackled simultaneously. This simple objective is not yet recognised nearly two years after the crisis started. Every month that passes by is a month that is lost. The summit has delayed the day of reckoning, and this is another failure.
The IMF expansion
The resources promised to the IMF and to regional banks are the bright spot. More was pledged than was expected, and this is a success. Yet, who will put up the money? Issuing new SDRs is a great step, but details seem to be missing for the half trillion, so sceptics have reasons to be worried that the money may not fully be raised. The quick disbursement of IMF funds is another very positive step, but it had already been announced by the IMF before the summit, so this is not really news.
The summit promises to adapt the governance structure of the institutional financial institutions to the reality of the brave new world we live in. Sorry, but this is not new and it has taken several years to shift a total of 5% of voting rights. Who will give up more? Will the Europeans reduce their over-representation? Maybe this is the beginning of the new world economic order, but it is very hard to believe that the developed countries are ready to make the concessions that this would require. A safe bet is very little will happen.
Finally, protectionism is nearly irresistible when millions more become unemployed each month. Asking the WTO to monitor lapses is good idea, except that the WTO already does that, and nobody hears. When public opinions ache and ask for protection, WTO warnings are unlikely to weigh much as governments try to save their skins. The best protection, quite possibly the only protection, against protectionism is a quick return to growth. So, we come full circle back to fiscal policy action. Good intentions and mutual pledges of good behaviour are all very well but far from enough.
In the end, except for the promises of more resources for the IMF, the summit has not succeeded in moving the agenda forward. Doing more was probably Mission Impossible and we must now go back where the decision power lies, at home in every country. What would be counterproductive would be to declare victory, or merely to claim that sufficient progress has been achieved, for it would lessen the pressure on governments to work harder. And work harder they must, very urgently. It would be a tragedy that the summit ends up encouraging complacency.