The outcome of the St. Petersburg G20 Summit is disappointing but not surprising. Even the logo chosen by the Russian hosts seemed, bizarrely, to evoke a collapsing pile of bricks, as well as a fissure within the G20, with the letter “G” as well as the number “2” being broken into fragments.
The most important part of the economic program was the attempt to construct an international framework for the coordinated tax treatment of large corporations, in order to reduce the shifting of profits to low-tax jurisdictions. It is easiest to see progress on this front being made within the European Union – but even there the implementation will be highly contentious, and is likely to be held up by important countries such as the United Kingdom and the Netherlands – as well as by the smaller low-tax countries. On a global front, actual implementation will be much harder.
The attempt to find a formula to describe how international monetary cooperation might work was much tougher, and the result fundamentally meaningless. The US view has always been that the Fed is politically, but also legally, obliged to follow price and employment outcomes in the United States, and that other countries should devise the appropriate tools to stop the effects of spillovers and fallout. In practice, this means restricting, in some way, the inflow of capital during the low interest rate regime, and then blocking outflows in the sudden stop phase, when the advanced countries move away from monetary easing. For the first of these options, it is largely too late. And the second has never been that effective unless accompanied by truly draconian measures, which would fundamentally erode the principles of an integrated global economy.
For the core industrial countries, the injunction to “carefully calibrate and clearly communicate” shifts in monetary policy is not very helpful at all. Clear communication is universally acknowledged to be an important feature of modern central banking, but it us hard when there are unanticipated shifts in market expectations. The result has been that markets tend, at present, to be quite skeptical about long-term forward guidance.
In light of the real and threatening possibility of a sudden stop for emerging markets – as well as in the wake of a long period in which the International Monetary Fund has seemed to concentrate its attention on the problems of a group of rich European countries – it is not surprising that the large emerging markets have sought to build their own US$100-billion foreign exchange insurance instrument, with US$41 billion coming from China. But this does not look as if it is really a credible answer to the sudden stop problem, any more than an Asian Monetary Fund would have been an answer to the 1997-1998 Asia crisis. The problem is that with the exception of China, all of the participants are potentially exposed to shocks – India and Brazil because of their current account position, and Russia because of its status as an energy producer.
In general, the financial and economic issues were largely overshadowed by the obvious security problem of how to respond to the Syrian crisis. That produced divisions, not just between the Russian hosts and the United States, but within Europe – and demonstrated once again the problem with expecting Europe to put forward a single security vision.
Philip Stephens put the point accurately in the Financial Times: “competition prevails over co-operation and narrow national interests trump respect for rules.”[1] It is difficult after this G20 summit to think that much is left of the original vision, and of the success of the exercise in April 2009 at the London summit.
It is time to think of better forums for how monetary and financial and fiscal cooperation can be hammered out. The summit made it clear that other voices and other institutions can tackle the issues concerned more sanely. Pope Francis had a clearer vision of Syria than the political leaders of the G20. Can the calmer corridors of international institutions produce a more effective response to the global coordination problem than harassed and humiliated leaders meeting in the glare of publicity?
[1] See Philip Stephens (2013) “No One is Left to Enforce the Rules,“ Financial Times, September 5. Available at: http://www.ft.com/intl/cms/s/0/b7a0e674-14b2-11e3-a2df-00144feabdc0.html#axzz2eBmJKxUr.