The heady days of the London and Pittsburgh summits of 2009 are gone. The spectre of the advanced world entering a “lost decade” is a real prospect. Governments are withdrawing stimulus as quickly as it was introduced. Mismanagement of the euro zone has largely eroded confidence to deal with the crisis that threatens to tear apart the single currency area. We are no nearer to a resolution of the euro crisis. All European summits ended in nebulous agreements in the early hours of the morning. Why would leaders think that repeatedly going to the brink of possible disaster — either a meltdown of financial markets in case of a debt default or the possible break-up of the euro zone — inspires confidence or demonstrates competence? It is no surprise that the public is disillusioned and financial markets are volatile.
The outcome of the G20 summit in Cannes demonstrates how far away we are from a world where governments cooperate for the greater global good. It is especially striking how quickly professed commitments to cooperate on and coordinate policies have evaporated. The summit’s declaration underscores that it is imperative to “...make globalization serve the needs of our people.” Yet, there continues to be an absence of political will to deal with the ongoing crisis. Another contributing factor is the rapid rise in debt-to-GDP ratios, as governments embark on a race to the bottom by promoting increasingly stringent austerity programs that risk weakening future growth even further.
It is clear that governments must communicate a credible medium-term plan to return their borrowing requirements to normalcy. It is equally true that some of the stimulus spending may have been misplaced, thereby contributing to the skepticism that governments can be effective managers of the economy. Nevertheless, what we are witnessing is a dramatic failure to accept the reality that, unless the world collectively decides to make a u-turn away from globalized finance and trade, sensible international economic governance must imply that all countries give up some of their cherished sovereignty. The fact that financial markets are pricing some sovereign debt to the point where borrowing costs are overwhelming budgets is as much a reflection of poor domestic economic stewardship as it is a recognition that once “riskless” sovereign debt contains a risk premium reflecting the failure of the G20, and close economic partners, to create rules that are both enforceable and seen to be enforced. If the euro zone cannot police itself, what hope is there for the G20? The facts have changed. Keynes said it best, when confronted about modifying his views: “When facts change, I change my mind. What do you do, sir?” It is time for the G20 to change course or face irrelevance.
German citizens, and others, may well be frustrated at how the seemingly never-ending crisis in the euro zone’s southern flank imposes a financial burden. Nevertheless, honesty requires that Germans also admit their role in glibly violating the Stability and Growth Pact they originally devised to prevent the very problem that is engulfing Greece and others. There was also a failure to encourage structural reforms that are now deemed necessary and being rushed into place, an inability to develop a common supervisory authority for the financial sector, and a failure to equip the European Central Bank with the wherewithal to step in as a lender of last resort when emergency conditions dictate. In addition, whereas successive treaties set out in some detail the governance structure of Europe, these were usually set aside. Most notably, France and Germany have acted as if the rest of the European Union would rubber-stamp any policy they agreed on. This is hardly a way to run a common currency area, let alone a common economic area.
In the absence of credible economic governance, the only game in town seems to be the International Monetary Fund (IMF). Yet, that institution, which has a long history of promoting unsuccessful policies — the Asian crisis comes to mind — is ill-equipped to act as a world lender of last resort. Moreover, the G20 has not provided it with the necessary tools to perform a meaningful role. It is ironic then, as 2011 is ending, that in the area of global economic governance we are, in a sense, effectively back to the debate between Keynes and White that led to the creation of the World Bank and the IMF. Keynes envisioned something akin to a global central bank while White favoured an approach with far less encroachment on national sovereignty, in keeping with the immutable US government’s position against giving up any sovereignty. The United States now keeps company with China, adopting the very same policy.
The only ray of hope comes from central bankers who, for the most part, understand the need for global rules of conduct in monetary policy and financial system stability. If the G20 provides the Financial Stability Board (FSB) with the necessary resources to set and enforce the required policies, it will have promoted an institution, inextricably linked to its own creation, to regulate the financial sector and make financial globalization work. It is all the more ironic then that the Bank for International Settlements, which currently hosts the FSB, was slated for liquidation as the IMF came to maturity in the early 1960s. It is the IMF that needs reforming and the proliferation of institutions claiming to represent the world community needs to be streamlined.
A possible way forward might be for the FSB to gradually take over many of the functions of the IMF, including much of its staff, who are highly competent. The well-known politicization of the senior staff at the IMF has not served it well. Keeping in mind the wise words of the former governor of the Bank of Canada, Louis Rasminsky, namely that the “...role of the central banker is necessarily greatly influenced by the system of government, by the stage of economic development, and by the organization of financial markets,” there is still time for the G20 to salvage something from the opportunity that has slipped from its grasp since 2009. Otherwise, it — like the euro zone — risks diminished membership or a breakup, because of a failure to take advantage of the benefits of collective action.