Is the G-20 a Good Idea Gone Sour?

Money

Source: http://www.flickr.com/photos/mattbrowne/

In 2008, finance ministers and central bankers from the world’s largest economies had a pretty good idea. Observing that the global economy was nosediving into recession — thanks largely to a massive financial crisis in the United States, though the contagion spared few — they decided to coordinate their efforts to prevent global depression.

These leaders invoked the spirit of past economic chiefs and organized under the Group of 20 banner, a more inclusive and ostensibly more powerful iteration of similar coalitions of economic leaders, such as the Group of Six. The G-20, as it has come to be called, accounts for nearly 90 percent of of global gross domestic product, 80 percent of international trade, and about 66 percent of the world’s population.

United against a common economic enemy, these leaders were able to coordinate actions and help stave off what could have been a crippling global depression. But at the conclusion of its eighth meeting since the peak of the crisis five years ago, the organization appears to have lost its mojo.

“It’s very difficult to come up with meaningful results,” Russian Deputy Central Bank Governor Ksenia Yudaeva told Reuters. ”Every step in right direction gets smaller and smaller.”

This unproductive melancholy appears to be the result of a few things. First, the G-20 consists of members from enormously different economies with economic ambitions that are not always necessarily aligned. During and in the wake of the 2008 crisis, every member was acting against the threat of global depression.

This was a common enemy that could unite all members of the G-20: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union.

But like most large bureaucratic bodies, without the weight of crisis pressing down on it, the organization has lost its focus. Different countries, each faced with unique problems, want to pursue different economic goals, and sometimes have a conflict of interest on specific issues.

For example, monetary easing in the U.S. has been a critical component of the recovery, both domestically and abroad. However, central bankers in the U.S. will ultimately have to decide the terms of a taper based on economic conditions within the U.S.,  and not on how a taper would affect foreign developing economies that rely on cheap financing made possible by monetary easing.

While developed economies may want to focus on financial reform, emerging economies want to focus on growth programs and development. And whereas European countries are interested in decreasing unemployment, Japan is interested in reducing debt.

As Faryar Shirzad, the global head of government affairs at Goldman Sachs, said to Reuters: “Each country gets one thing added to the agenda. Next thing you know you have an encyclopedia that comes out of the leaders’ statements.”

On Friday, following a meeting in Washington, D.C., G-20 leaders issued a statement that largely reflected this diverse agenda but also highlighted one dominant issue: the developing fiscal impasse in the U.S.

“The U.S. needs to take urgent action to address short-term fiscal uncertainties,” the G-20 communique says, ostensibly speaking directly to the ongoing partial shutdown of the U.S. government and debt ceiling brinkmanship.

Leaders of various G-20 nations have already commented on the fiscal situation in the United States. Foreign governments own about $5.6 trillion in U.S. debt, so a default — however unlikely — is high on their list of risks to watch out for. Mainland China alone holds approximately $1.3 trillion.

Chinese Deputy Finance Minister Zhu Guangyao commented on the situation earlier this week, calling on the U.S. to avoid a default. “The U.S. is the world’s biggest economy and a major country issuing reserve currency. Safeguarding the debt is of vital importance to the economy of the U.S. and the world,” he said at a news conference, according to Xinhua.

But the G-20, with all of its influence, can’t actually do much to address the fiscal situation in the U.S. The communique and other forms of politically correct urging are about as far as the group can go in applying pressure on Congress.

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