The G20 summit will not mark a turning point in the path of this crisis; but it provides the strongest reason yet to be less pessimistic about the future. The 29-point communiqué sets out a clear path for a sustainable recovery and lays down sensible principles to guide the recovery and its aftermath. Gordon Brown and his fellow leaders deserve praise. The devil is in the details. But better he is there than stirring up trouble at the ports, promoting protectionism and beggaring thy neighbour.
A considered document
Crises seldom breed balanced responses. But one of the striking things about this communiqué is that, for the most part, it focuses on the real issues and does so in a considered manner. In the areas of financial regulation and trade the leaders could all too easily have been seduced by base appeals to 20 separate electorates. There are broadly five areas in which the communiqué sets out a balanced framework to guide national policy makers.
Concern for the world’s poorest
First, although these are the 20 or so largest economies in the world, at the centre of the document is concern for the world’s poorest – even thought the pre-meeting tussle was about stimulus packages and financial regulation in the US and Europe. This concern is reflected not just in warm words and the ritual reaffirmation of the Millennium Development Goals, but:
· A proposal to treble the resources of the IMF from $250bn to $750bn,
· Increase liquidity of IMF members through a $250bn SDR issue, and
· Moderate conditionality for emergency funding with new facilities such as the Flexible Credit Line.
Mr. Brown has pulled some large rabbits from his hat. The man is wasted on the parochial matters of running a single nation state.
Second, the communiqué has the usual talk of improving the voice of the poor and surveillance of the rich. Included is the ageing commitment to end the horse-trading between nineteenth century powers in selecting leaders of international institutions. We are still waiting for Godot at the IMF and World Bank, but the newly reformed Financial Stability Board is more representative.
Third, the great depression of the 1930s became “great” because nation states turned inward. The G20’s strong commitment against protectionism and competitive currency devaluations gives hope that we will not repeat that mistake. The Leaders have made this commitment before and then many engaged in seemingly opposite steps. But there is a new commitment to enforce surveillance and implementation of WTO rules and an explicit recognition that spending packages are manipulating trade. We should be grateful that the G20 starting point is that protectionism is a problem, not a salvation.
Fourth, the German and French leaders have been arguing that the London declaration should herald tough new international regulations. The public mood is certainly one where we could easily go from poor but light regulation, to poor but heavy regulation. This document rightly places macro-prudential regulation and counter-cyclical interventions at the centre of a new regulatory framework. It also raises important issues of value accounting. These are the kinds of initiatives – discussed earlier in the Geneva Report and Turner Review – that will make a difference. The communiqué does make populist nods to the regulation of hedge funds and off-shore financial centres that had little to do with the crisis, but it sensibly balances these political desires by focusing on systemically important institutions, whatever they may be called, and on issues of tax secrecy, a problem oddly monopolised by small European principalities.
Development, stimulus and exit strategies
Fifth, according to the communiqué, international trade and development commitments and national spending commitments so far, tally over $5trn. These numbers may be exaggerated for effect, but when the fiscal initiatives are coupled with the extraordinary and unconventional easing of monetary policy, there is no doubt that the world has been given an unprecedented injection. If well-targeted, a big if, the scale of this injection should moderate the impact of the crisis on jobs and poverty, and support an economic recovery by 2010. Yet, in all this the communiqué also recognises that there are inflationary, debt and competitive implications of government actions so far and there is a need for governments to have clear plans to exit nationalised banks, revive private-sector driven credit formation and restore fiscal balances.
When it comes to implementing this blueprint, inconsistencies will surface. Despite all the grand international talk, sensible macro-prudential regulation such as counter-cyclical capital charges and liquidity buffers are best done nationally. Powerful countries may use global rule-making as a form of protectionism. Doing whatever it takes to restore growth in the US necessarily conflicts with inflation containment and fiscal consolidation. Encouraging Asians to put up more money for the IMF and giving more voice to the poorest countries, requires a commensurately lower voice for the Europeans. There is plenty for the devil to make mischief with; but it is hard to think what more the G20 could have done.