Monday 15 Aug 2022 | 06:02 | SYDNEY
Monday 15 Aug 2022 | 06:02 | SYDNEY

G20 finance meeting: Mexican stand-off


Stephen Grenville

6 November 2012 11:32

The G20 finance ministers' and central bank governors' meeting in Mexico last weekend provides some uncomfortable messages for Australia as hosts of the 2014 G20 meetings in Brisbane: unless it provides a forum for top-level policy makers to confront the vexed issues of current international economics, the G20 risks irrelevancy.

The G20 finance meeting is not, of course, as prominent as the G20 Leaders' Summit but it does discuss the core issues of international economic cooperation to ready them for endorsement by the leaders. With its focused agenda and more technocratic participation, this meeting keeps the G20 process focused.

In mid-2012 the overall G20 scheduling was thrown out of kilter when the Mexicans wanted to have the leaders' meeting before their domestic elections, so that President Calderon could impress the voters with his international status. Similarly, the G20 finance meeting should have been held ahead of the October International Monetary Fund meeting in Tokyo, because the G20 should be the de facto high-level coordinator for the IMF, setting the Fund's broad agenda.

Thus the just completed meeting was off schedule. Worse still, at least two key participants decided not to attend: US Treasury Secretary Tim Geithner had a 'scheduling issue'; also absent was Mario Draghi, European Central Bank President.

It's not as if there was a shortage of substantive issues to discuss. The parlous prospect of the world economy is exactly the sort of thing the G20 was formed to address. Nor have economists run out of sensible remedies to explore. Let's start with Europe.

For close to three years, the unsustainable government debt load in the southern periphery has kept Europe stagnant, with growth prospects pushed further into the future with every new forecast. The excess government debt has been kicked down the road with various partial support systems but the basic problem has not been addressed through a substantial debt reduction. 

Greece, Spain and Portugal (and perhaps Ireland and Italy as well) can fix their debt in three possible ways: growth, inflation or default. The first is unattainable, the second undesirable and the third inevitable.

In addition, a solution is needed for the international uncompetitiveness of the southern periphery. What limited progress there has been in recent months has been on a different track: the 'more Europe' discussion about centralisation of fiscal policies and bank supervision. Whatever the merit of this remedy as the next step in evolution of the EU, it will take decades to achieve. The debt problems can't wait.

Meanwhile, across the Atlantic, whoever is president on 1 January has to prevent the US economy falling over the 'fiscal cliff': the 5% of GDP contraction that will occur if legislation on income tax, payroll tax and unemployment benefits is not changed. While total inaction would be so disastrous that most commentators see it as inconceivable, avoidance will be ad hoc and incomplete. From this unresolved mess, a solution must be found to the longer-term problem that America does not raise enough taxes to pay for a level of government services which are the minimal norm for an advanced country.

Without overstating the power of international discussion to make the world a better place, these are the circumstances where a well-functioning G20 might play a positive role at the margin. The Europeans, bogged down in moralistic arguments about fiscal rectitude and the sanctity of debt, might be gently reminded that their efforts of the past half century to create a better Europe are at stake. Americans, away from the doctrinal tub-thumping of Washington, have an opportunity to discuss how they might go about funding a level of government services appropriate for the world's most advanced country.

For these discussions, the IMF's World Economic Outlook provides the context. Whereas two years ago economists were in heated disagreement on whether fiscal austerity would promote or harm growth, the Fund has crystalised the commonsense reality that sharp fiscal contraction is bad for near-term growth. Similarly, the Fund has sieved through the historical record to demonstrate that adjusting international competitiveness by austerity rather than by changing the exchange rate is excruciatingly painful. These discussions, relevant to the domestic policy of the growth laggards, might strengthen the hand of sensible domestic policy makers.

Instead, Secretary Geithner is staying in Washington. He is not a politician, so the election is not an excuse. And it's not far for him to go. He has already decided to quit the job after the election, so maybe he just can't be bothered. Or maybe he doesn't want to be on the receiving end of advice on how to fix the fiscal cliff, or field complaints from emerging economies around the table that America's sustained monetary policy accommodation is distorting exchange rates and international capital flows. Or maybe he is having trouble explaining why America, as a champion of fixing the IMF's governance structure to belatedly give emerging countries a fair share of the decision-making votes, has not passed the necessary legislation to implement this policy.

Perhaps the Europeans don't want to have the inadequacies of their current policies put up for public discussion either. The differences of view between Draghi and the Germans are sharp. But if G20 is not the forum for such discussions, what is its purpose?

Photo by Flickr user Garthe Knight.