Saturday 24 Oct 2020 | 23:43 | SYDNEY
Saturday 24 Oct 2020 | 23:43 | SYDNEY

What the G20 meeting should be about


Stephen Grenville

10 October 2011 13:35

Next month's G20 Leaders' meeting in Cannes faces a testing time. The leaders are important people who want to spend their time addressing the most pressing economic issues of the day. But the two most pressing issues don't fit the G20's territory.

The first problem is Europe's sovereign debt mess. This disarray has the capacity to seriously damage the entire international economy, and yet the solutions lie mainly (if not exclusively) in European territory. Greece has to be bailed out and the other southern Europeans have to be shored up. This costly task is squarely Europe's obligation. G20 Leaders could give the Europeans a lecture on how important it is to sort all this out, but that won't be much appreciated.

The second obvious problem for the world economy is the stalled US recovery. Again, there is an opportunity to give the US a lecture on maintaining short-term stimulus while simultaneously putting in place medium-term budget restructuring. While the US has been quite ready to tell the Europeans how to sort out their problems and to tell the Chinese to appreciate their exchange rate, Washington doesn't take kindly to lectures from other countries on how to run US policy.

Certainly, the world economy is at a serious conjuncture and there is room for the G20 leaders to say how exigent all this is. But leaders usually want to have more substance – more 'deliverables' than a generalised hand-wringing.

Worse still, financial markets expect the G20 to 'do something'. The current market mood – with almost-daily swings from pessimism to optimism – suits the professional players, who benefit from volatility. They will be very ready to be optimistic before the meeting and then be very disappointed when the G20 doesn't deliver a miracle.

So here is a suggestion for the agenda. Right at the beginning, the Chairman should announce that the G20 understands the seriousness of the European and US situations and expresses confidence that the relevant authorities (not the G20!) will soon solve the problems. Then, having disposed of these issues in a way that makes it hard for the markets to characterise the discussion as a failure (after all, there has been no discussion), the meeting should get on with longer-term issues.

What else might they do? Infrastructure is already on the agenda, so here's one possibility to put some substance into the meeting.

The starting point is that the world's investors are now so pathologically risk-averse that they have retreated into extraordinarily low-return assets – US, Japanese and Swiss government bonds. The US government can now borrow ten-year-money for less than 2%. To be able to borrow at negative real interest rates should be a golden opportunity to fund investment, but the countries which can tap these low-cost funds have binding political constraints on their ability to borrow more.

What about the G20 directing one of the international institutions (say, the highly credit-worthy World Bank) to seize this opportunity to fund a Marshall-program-style stimulus to the world, building infrastructure?

Where should this infrastructure be built? It could be in the fast-growth infrastructure-deficient countries of East Asia, such as Indonesia. It might be in the UK, whose experiment with fiscal austerity has brought the economy to a grinding halt. It could be in the US, where years of neglect have left a dilapidated capital stock. The criteria would be two-fold. First, what projects are 'shovel-ready'? Second, even almost-free money has to be paid back eventually; borrowers must be able to do this.

There are many cogent reasons why this idea is too difficult to execute. One of the badges of leadership is the ability to cut through the bureaucratic procrastinators and sharp-pencil cost-benefit nay-sayers. Leadership is about seeing the connection between low interest rates, stagnant world activity and unmet infrastructure needs. This would make a better discussion than lecturing the Europeans and the US on issues their politicians can't resolve.

Photo by Flickr user WSDOT.