The global economic recovery has lost considerable traction over the past six months, with both headwinds and downside risks having increased. Anemic growth in major advanced economies has become more entrenched, and unacceptably high levels of unemployment show no sign of decline. In emerging economies, the buildup of inflationary pressures remains a serious concern, notwithstanding purported policy actions and the possible consequences of overall slower global growth for commodity prices and aggregate demand in these countries. Widely diverging rates of economic growth continue to generate capital flows that trigger competitive reactions and tit-for-tat responses. Unresolved sovereign debt problems in the eurozone and the United States, together with no discernible progress in reducing current account imbalances and a continued rapid pace of foreign exchange reserve accumulation in surplus countries, has led to renewed market volatility and revealed a void in the direction of policy. Uncertainty about the direction of policy, verging on a crisis of confidence, represents one of the major obstacles to achieving a more robust global recovery and stronger growth over the medium term.
In 2009, G20 leaders launched the Framework for Strong, Sustainable and Balanced Growth to secure global economic growth and manage the risks of financial instability through international policy cooperation. Actions to date, however, have fallen far short of commitments. Not only has there been a failure to act in the collective interest, but as well, given the political rancour around critical policy issues, many G20 countries have increasingly been taking unilateral actions centred on domestic interests with no regard to global spillover effects. Recognition of the benefits of collective, multilateral action has been pushed aside.
The global financial crisis showed that economic and financial interdependencies are now more pervasive, more complex and deeper than previously understood. Because of these linkages, one country’s policies can have spillover effects on other countries. To secure the benefits of an integrated world economy, all countries need to recognize the implications of those interdependencies and linkages in their domestic economic policies. This means taking into account the spillover effects of domestic policies on other countries and on the wider world economy, which, in turn, have feedback effects on domestic economies (Subacchi and Jenkins, 2011).
The Cannes summit represents a critical time in the work of G20 leaders to refocus attention on their policy commitment to deliver strong, sustainable and balanced growth. Failure to do so risks plunging the world back into financial crisis and global recession.
Earlier this year, G20 authorities, after an arduous process, reached agreement on the key indicators to assess whether external and internal imbalances could put G20 objectives at risk. These indicators include measures of public debt, fiscal deficits, private saving, private debt, and the external balance composed of the trade balance and net investment income flows and transfers. As well, agreement was reached on establishing indicative guidelines — that is, benchmarks against which indicators would be assessed — to evaluate imbalances. While the acceptance of indicators and guidelines to define significant and harmful imbalances is an important step forward, the real test will come at Cannes in terms of G20 leaders reaching agreement, or not, on the policies needed to secure global economic growth.
The reality is that the policy prescription to achieve strong, sustainable and balanced global growth has not fundamentally changed since the 2010 Toronto and Seoul summits. Not all countries can rely on export-led growth. The United States needs to raise its level of national savings and China needs to promote a rotation in its economic growth towards more domestic demand. Fiscal positions in major advanced countries need to be placed on a sustainable medium-term track, requiring tough political decisions grounded in the reality of the situation. Emerging economies need to contain inflationary pressures and ensure their monetary policy frameworks can sustain domestic price stability. To support all of these policy outcomes, greater exchange rate flexibility and structural reforms are required. And the momentum on global financial reform must be maintained.
Multilateral policy cooperation is a tall order, but this is what lies at the heart of the G20’s work. More integrated networks through trade and financial linkages make the transmission of shocks and contagion much faster and more powerful, and increase the risk of macroeconomic instability and financial volatility. We saw this at the peak of the global financial crisis as developments in financial markets ricocheted around the world, dragging all countries down. And we have seen it again recently, related to the sovereign debt problems of advanced countries.
With diverging economic growth, excessive volatility in capital markets, competing exchange rate regimes, unresolved fiscal and sovereign debt problems, and failures of governance, the importance of international policy cooperation takes on even greater urgency today. The costs of non-cooperation are painfully evident.
To tackle these challenges decisively, to lift the cloud of uncertainty that prevails around the direction of policy, and to overcome the tensions between domestic and international objectives, G20 leaders must come to agreement on, and begin to implement, the policies necessary to secure strong, sustainable and balanced global economic growth when they meet in Cannes in November under the French presidency. Now is the time to deliver.
Subacchi, Paola and Paul Jenkins (2011). Preventing Crises and Promoting Economic Growth: A Framework for International Policy Cooperation. A Joint Chatham House and CIGI Report. April.