The G20, comprising the world’s leading economies, met in Washington recently alongside the semi-annual International Monetary Fund (IMF)-World Bank meetings of finance ministers. During the economic crisis and its recovery phase, the G20, which has emerged as the premier global economic forum, appeared to be a cohesive unit, capable of taking collective decisions for the good of the world economy. Economic co-operation among countries was particularly evident in the G20 summits of 2008 and 2009 which helped stay off a deeper recession. In concrete terms, it increased the reserves of the IMF and development institutions by over $1 trillion and implemented a coordinated fiscal package of over $5 trillion. However, more recently, there has been a perceptible change in the attitude of economic powers in relation to one another. A “consensus” approach towards common economic problems has not been possible.
This has been amply borne out during recent discussions. Informed observers say that the G20 and the other international economic meetings highlighted big divergences in economic policy around the world. Equally significantly, there have been so few attempts at a minimum level of coordination among big countries.
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During the discussions, controversial topics were downplayed. For instance, on currency rates, the G20 merely reiterated its stand that countries should move towards market-determined exchange rates and “should refrain from competitive devaluation and will not target exchange rates for competitive purposes.” In the circumstances, the communique at the end of the meeting was as bland as it could be.
On growth, the G20 acknowledged that “further actions are required” to put the global economy on track of strong, stable and balanced growth.
On monetary policy, the communique said that it should be directed towards domestic price stability, and continue to support economic recovery according to the respective mandates of central banks. On fiscal policy, it called for advanced countries to maintain fiscal sustainability and develop medium-term fiscal strategies.
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There were few common concerns. One such related to ultra-soft monetary policies being pursued in the developed world. As Finance Minister P. Chidambaram pointed out, quantitative easing by the U.S. and European central banks spur capital flows to the emerging markets like India. The danger of such flows reversing themselves is real and something that ought to concern everyone.
Mr. Chidambaram had earlier remarked that though the G20 ought to be more concerned with global issues, the discussions at Washington would have been more appropriate for the G7 — so little of global issues figured at the meetings.
Actually, the G20 had much to worry about. There was a strong undercurrent of pessimism on the eve of the recent meeting. The global economic outlook was seen to be deteriorating even though the IMF’s World Economic Outlook (WEO), which was released ahead of the meeting, was reasonably positive. The WEO talked of a three-speed global economy and “bumpy” roads ahead, but said “global prospects have improved again”. This optimism, however, soon disappeared as news of poor labour market results in the U.S. and weaker than expected growth in China came in.
There has been an awareness of new risks to financial stability. The old risks dating back to the financial crisis or before have not been solved. Banks in the eurozone suffer from capital inadequacy. With their governments unable to recapitalise them, the threat of failures loom large even as the mountains of debt they are sitting on cannot be whittled down easily.
The new risks arise essentially from the extended period of monetary easing undertaken by the U.S., European Central Bank and Japan. There is a genuine apprehension that banks in the U.S. might be reckless with their lending so early in the recovery phase.
In emerging markets, companies might be tempted to borrow out of proportion to their ability to repay. Altogether easy money availability might tempt important players to take risky gambles which may not come off.
The inability or unwillingness of the G20 to come up with some co-ordinated action points to deal with global level problems, according to perceptive observers, underscores its decline. Nothing useful was expected from the recent Washington meet and nothing came.
narasimhan.crl@thehindu.co.in