London Calling: Reading the G20

A global response to recession should have been world leaders’ top priority at the G20 summit. Their failure to find it doesn’t look good.

The good news from London...

Despite all the hype, the G20 meeting in early April failed to deliver on some critical issues. Agreement on beefing up the IMF’s reserves sent an important signal to economically developing countries, reassuring them that the industrialized states would not abandon them in this crisis. Everyone was prepared for greater regulation of international finance, though the trouble there typically lies in getting everyone to agree on the form and level of regulation, not on the need. Design and implementation may take so long we all forget they agreed on it.

...and the bad.

The bad news was the failure to agree on the need for coordinated efforts to stimulate economies around the world. We knew the leaders of the world’s largest economies didn’t agree on this; if they all agreed it wouldn’t have been an issue for discussion. In case anyone hadn’t understood that, the Czech prime minister underscored differences in opinion for public consumption. The difficulties come in two forms: one surges through the economy via trade, the other is the political backlash that emerges in trade’s wake. The U.S. government has already injected billions to stimulate the American economy. Americans are being encouraged to spend now. Given that the U.S. economy is one of the most open markets (among the major economies), some of that money Americans spend will go towards purchasing imports. That creates activity abroad, saving some jobs among those exporters. Good for someone, just not the voters Congress and President Obama are meant to be serving. If you spend billions of dollars and the results show up in job creation elsewhere, you might not be happy. That sort of unhappiness manifests in trade disputes – both coming from the bottom (from American workers whose jobs weren’t saved) and from within the Administration, as it feels the U.S. carries unappreciated burdens of leadership. As much as professors and pundits alike have relished that this financial crisis heralds the end of American leadership in the international economy, the failure to see others even match the American stimulus plans means the leaders of these other countries are counting on American efforts to pull the world out of this recession.

Takeaway Points:

i) Historically, failure to coordinate these efforts leads to bad blood in subsequent years. Good intentions don’t overcome that bad blood – just look at the Carter Administration after its failed “locomotive strategy” in the late 1970s.

ii) These summits are about PR; photos and slogans aside, they can send powerful signals, and right now the most important thing to manage is the psychology of the markets. So we might see success, if only in the words sent out.

iii) Scale of stimulus efforts matters less than just getting everyone on the same page, moving in the same direction at the same time. They could have done better.