G-20’s Clever Non-Cooperation Will Widen Global Imbalances
G20’s commitment on Sunday to halve government deficits by 2013 and “stabilize” debt loads by 2016 is not international cooperation, but a statement that describes national policies already in place. Entailing that all countries can adopt the policies they want to adopt, the communiqué struck a balance between thrifty and spendthrift nations, respectively spearheaded by Germany and the United States. It implicitly redeems Angela Merkel, demonized as the frugal Swabian housewife amid Europe’s economic uncertainties, and buys time for the Obama administration to perpetuate America’s epic deficits past the 2012 presidential race. What does this mean?
For one, it merely reflects the familiar fact of international relations: fiscal policy is a sovereign prerogative. But the policy status quo also entails widening of global imbalances. Europe’s fiscal retrenchment and US spending, coupled by weak euro and Asia’s continued export drive, will reaffirm US role as the world’s consumer of last resort. In this “Bretton Woods III” regime, global imbalances will be sustained by massive US public deficits, not private consumption as was the case pre-crisis. The outcome is troubling for three reasons. First, trade deficits are America’s familiar precursor to protectionism. US trade agenda is already non-existent, and November mid-term elections postpone G20’s repeated commitments to conclude the 9-year Doha Round even further. The global trading system that America has championed for decades continues splintering by a race for bilateral accords, a distant second best to a global deal. Second, imbalances undermine confidence in US economy. As current account deficit peaked at 6.5 percent of US GDP in 2006, confidence in the US economy was feared to erode and the dollar deemed to fall by as much as 40 percent. While the crisis was not caused by a “sudden stop” of capital inflows in the United States – instead, as the crisis globalized, money flowed to America in escape of turbulence elsewhere – US debt is now approaching record levels where a sudden stop is more plausible. What’s more, interest payments will divert resources abroad right when America’s global competitiveness squarely depends on investing in its next generations at home.
Catherine Mann estimates that runaway deficits at 10 percent of GDP in 2030 would entail an annual transfer of 7 percent of US GDP overseas in debt payments, the equivalent to the output of New York state. Third, a rebound of imbalances complicates the US-sponsored G20 “Framework for strong, sustainable and balanced growth,” a concerted effort to contain imbalances through a peer-review process. The G20’s credibility is at stake: how the group deals with the imbalances will be a key barometer of its performance. Unlike the other items on its agenda – financial regulations, IMF reform, trade liberalization, and so on – that will ultimately be dealt with in other forums, the imbalances are and have been the core competence of the G system since its founding in 1973. The collaboration, while grudging, had its successes, most notably the historic 1985 Plaza Accord among the G-5.
At time of record deficits, America cannot be yet again become the world’s buyer. Yet that is happening. Washington urgently needs a plan for fiscal consolidation. Growth cannot be killed and certainly not by taxes, already because tax revenue hinges on robust growth. But instead of indebting America further, the Obama administration must issue a credible plan for reducing the deficit and prioritize private sector-led growth. President Obama’s commission on national debt must think bigger and for the longer haul than stopping at advocating a value added tax. The trade-offs are meager: any negative effects of reduced spending are consistently offset by greater availability of capital investment. Historically, robust investment and growth have been sustainable only on the back of domestic saving. America’s main counterpart in the global balancing act, China has to do it share. Beijing’s pre-summit token renminbi revaluation helped it, as intended, deflect G20 attention away from its currency manipulation. China must commit to a staged currency revaluation and structural reforms so as to end its export-dependence.
Emerging Asian nations have scant incentives to revalue their currencies before China and Japan do so. Beijing needs to be a wayfarer in building vibrant services economies stoking consumer-led growth. In the G20, continuity is crucial. The leaders need to regularly dedicate time to addressing the imbalances, single out laggard nations, and continue to measure progress – and act in its absence, such as by calling a special finance ministerial. Rubber hits the road in the November Summit in Seoul. Without action by all key governments, the G20 will be relegated to a talk shop without stomach for tackling global economic challenges. The best factual statement of national policies then would be about saving in America, growth in Europe, and robust import demand in Asia.
The views expressed in GMF publications and commentary are the views of the author alone.