Mohamed El-Erian, a prolific and dependable analyst of global economic affairs, wanted a “Sputnik moment” in Shanghai on the weekend. Just as watching the Russians take the lead in the space race prompted the Americans to get serious, El-Erian wished that the terrible start to 2016 would spur the finance ministers and central bank leaders of the G20 to do something to enliven the headlines on his Bloomberg terminal.
The G20 let down El-Erian, as I suspect he knew it would. The failure wasn’t denial. Finance chiefs identified everything that either is wrong with the global economy, or that could go wrong: volatile capital flows, a “large” drop in commodity prices, geopolitical tensions, the United Kingdom's possible exit from the European Union, and the surge of refugees in Europe. But this unusually long list of vulnerabilities wasn’t enough to inspire a collective response. Instead, the G20 told the world’s traders of financial assets that they should stop staring at their screens and take a walk in the real economy.
“While recognizing these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy,” the G20 said in a statement at the end of its meeting. “We expect activity to continue to expand at a moderate pace in most advanced economies, and growth in key emerging market economies remains strong. However, we agree that we need to do more to achieve our common objectives for global growth.”
A fair assessment of the situation was probably the best that could be expected from the G20. The G20 has missed so many opportunities to instill confidence in the global economy since its heyday in 2009 that it’s become boring to talk about it. This group gets excited by fires. Reconstruction? Less so. In fact, my expectations of the world’s most powerful finance ministers and central bankers were so low, I was somewhat impressed with some of the things that were said in Shanghai. There was enough movement in rhetoric to suggest that El-Erian’s “Sputnik moment” is at least conceivable if the global economy seriously deteriorates. And the G20 may -- may -- in fact be serious about making itself accountable for its pledge to increase the group’s collective gross domestic product by about 2 percent by 2018.
There were reports the G20 was split over the need for co-ordinated fiscal stimulus. As long as German Finance Minister Wolfgang Schaeuble is at the table, a “split” is certain. Schaeuble is a stubborn ideologue who has been the focus of increasing ire over his stubborn resistance to using the German treasury to generate increased European demand. With the support of Canada, German officials had ensured a nod to the importance of fiscal sustainability or some such in most G20 communications of recent years. Not this time. The G20 said monetary policy is reaching its limits, a sentiment with which Schaeuble would agree. But any suggestion governments should actively cut spending disappeared in Shanghai. “Monetary policies will continue to support economic activity and ensure price stability, consistent with central banks' mandates, but monetary policy alone cannot lead to balanced growth,” the statement said. “Our fiscal strategies aim to support the economy and we will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path.”
The G20’s counter to criticism that it has become a do-nothing organization would be its promise to boost GDP by 2 percent over the medium term. In Brisbane in 2014, leaders boasted of the more than 1,000 measures they intended to implement. It was a silly boast that undermined the G20’s insistence that it was committed to transparency and holding itself accountable. Only the most committed outside analyst could keep track. The IMF makes periodic attempts, and has determined that the G20 has managed to boost GDP by only 0.8 percent so far. This is a murky business that could stand improvement. Surprisingly, the Chinese appear to have an idea. The G20 statement spoke of “guiding principles” for the G20’s reform efforts, and the creation of an “indicator system to further improve assessing and monitoring of the progress of structural reforms and their adequacy to address structural challenges, taking into account the diversity of country circumstances.”
The G20 commissioned research on the subject and said it would review the matter when finance ministers and central bankers next meet in April at the spring meetings of the IMF and the World Bank in Washington.
All this falls short of what people such as El-Erian wanted to hear. Tristram Sainsbury, a research fellow at the Lowy Institute, noted that the G20 is ignoring expert opinion, which broadly has swung in favour of fiscal stimulus.
El-Erian reckons finance ministers have set themselves up for trouble. He predicts global demand will continue to diminish, the gap between the rich and the rest will continue to expand, and that market volatility will continue. “These conditions will set an even more worrisome context for country officials when they next come together in April in Washington for the spring meetings of the International Monetary Fund and the World Bank,” he said in his latest column for Bloomberg View.
That would increase the probability of a “Sputnik moment,” as it will take more than bumpy financial markets to force the G20 into action. But the group no longer is debating itself into paralysis over the better policy, fiscal stimulus or austerity. There is a new consensus on what to do. The debate is over when to go for it.