- Attention: Deficit DisorderThe G-20’s modest steps toward a more coordinated fiscal policy
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In November 2008, governments representing over two-thirds of the world’s population gathered hastily in Washington, D.C., to try and stop the global economy from unraveling. The emergency summit may not have reshaped the financial system or produced a set of detailed fiscal measures, but with a historic five-page communiqué, world leaders proved to the market and each other that they agreed on strategy and that their stimulus plans would be complementary. A Brookings Institution policy brief hailed this G-20 meeting as “a giant step forward.” But the congratulatory air was short lived. The onset of the sovereign debt crisis in the eurozone soon highlighted a major shortcoming of the common currency project: the lack of fiscal harmonization. [End Page 101]
These turbulent years since 2008 have demonstrated how crucial coordinating fiscal policy can be. A country’s tax rates and spending levels are the levers of last resort to steer economies, and politicians carefully guard this sovereign authority. But, in the short term, governments must confront this period of economic slowdown by working together to stimulate global demand, even as many of them struggle to rein in large public debts. In the long term, governments must address the persistent imbalance between countries with excessive savings, such as China and Germany, and those with excessive consumption like the U.S. This imbalance contributed to the 2008 global financial crisis by feeding excess savings into real estate bubbles across the world. Failure to work together may condemn the world to repeating this mistake.
The sort of international economic coordination we saw among the countries of the G-7 (Canada, France, Germany, Italy, Japan, the U.K., and the U.S.) during the last third of the 20th century may no longer be possible, thanks to the rise of China, India, and other large developing countries. Thus, the challenge facing the 21st century’s leading economic forum, the G-20, is to manage the global economy at a time when the United States and a small group of advanced economies can no longer impose their preferred solutions.
What can we hope for from the G-20 when it comes to dealing with these challenges? Panglossians tell us we should relax, because the real lesson of the global financial crisis is that “the system worked.” By coordinating fiscal policy to stimulate global demand and monetary policy to keep the financial system afloat, disaster was averted. Cassandras tell us that we’re in a “G-zero” world, where no country has the political and economic leverage to drive global policies, opening a power vacuum with no one able to decisively influence events. There is an element of truth to each of these claims: The G-20 performed sufficiently well in 2008–2009 as a forum for crisis management—and can be expected to do so in the future—but it has produced only modest progress since 2010 in tackling the coordination of fiscal policies needed to avoid the next crisis.
G-20 governments, which account for nearly 90 percent of the world’s GDP, have struggled to synchronize fiscal policies in the aftermath of the crisis. While all countries want international economic stability, they would also prefer others bear the brunt of the painful economic changes necessary to redress imbalances. To some extent, overcoming this game of “pass the buck” has become harder with fundamental policy disagreements among leading states as well as a larger, more diverse group of economic powers with the clout to say “no.” In this new world, the G-20 forum—and its essential partner, the International Monetary Fund—must nudge its members toward greater consensus on the need to share the burden of ensuring systemic stability.
For those who bemoan a “G-zero” world, the key missing ingredient for international economic cooperation is leadership. While leadership is rarely benign in practice, there is something to the notion that assertive action by one or a few large economic powers is necessary...