A chance for real change at the G20

September 21, 2009

For years, policy makers were able to cut and paste statements on global imbalances from one communique to the next. The words were never backed by action. This G20 meeting could very well be different.

Most commentators are not expecting much. Such cynicism is easy to understand. When the IMF tried to bang heads together in 2006 the result was a series of empty pledges. It now makes for comic reading.

The United States swore to eliminate the federal deficit by 2012 and contain spending growth. China agreed to allow further exchange rate liberalization. The euro area said it would reform labor markets. We all know what happened to these promises.

But self-interest is providing a strong tailwind behind the current talks.

One background motivator at the G20 may be the mounting suspicion that imbalances were a leading culprit of the 2008 financial crisis. The tide of savings flowing from China into the U.S. bond market certainly helped fuel the asset price bubble by lowering borrowing costs.

The influential governor of the Bank of England, Mervyn King, recently warned that unless the situation is resolved the world was “doomed to repetitions” of the meltdown and the “substantial recessions” that accompanied it.

This theory is unlikely to be the driving force, however. Imbalances may after all have only played a walk-on part in the crisis. The deluge of money from China did not oblige U.S. regulators to tolerate a surge of bank leverage and a slide in lending standards.

Moreover, it was always assumed that an off-kilter global economy was dangerous. For years economists fretted that it would lead to a calamitous fall in the U.S. dollar, soaring interest rates and a global slump.

Instead the main motivator at the G20 and beyond is likely to be the fears of the world export giants. A mercantilist approach to economics works only when you have free-spending consumers. And they are becoming a globally scarce commodity.

In the United States, debt relative to disposable income — though down slightly — is still close to double its peak after the 1980s boom. It could take three to five years of high saving just for Americans to reduce their debt burden to a more manageable 100 percent of disposable income. With unemployment edging toward 10 percent they will not soon return to their profligate ways.

For China, where the United States accounts for close to a quarter of exports, this is a sobering message.

Even Germany — which relies on the United States for less than 8 percent of overseas sales — can have no reason for complacency.

Nearly 15 percent of Germany’s exports before the crisis headed for Eastern Europe. Many of these states may now take years to fully recover from the hangover of the financial crisis. The fast-growing fringe economies such as Spain also accounted for much growth. They too are in the doldrums.

Nor do the BRIC economies offer quite the outlet for exporters that some have assumed. Consumer spending in Brazil, Russia, India and China combined still came to only $2.5 trillion last year, according to calculations by Rachel Ziemba at Roubini Global Economics. This is little more than a quarter of consumption in America.

Figures like these should start to focus minds of leaders in the world’s export titans — China, Japan and Germany. Boosting consumption as a share of the economy will take years for these nations, so the sooner they start the better.

But sooner or later slack world demand will achieve what dozens of communiques and conferences failed to do — a more symmetric world economy.


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The author refers to Spain as a fringe economy. Really? Even now, in the midst of the crisis, Spain is the 8th or 9th ( depending on the measurement criteria used) world economy and up to 2008 has been the fith largest world investor ( the second in Latin America, the second in the UK and the fourth in the US).

Posted by Luis Montes | Report as abusive

Just for clarification, I’m a big fan of Spain. But it is still quite a small economy by global standards.

Posted by Christopher Swann | Report as abusive

India doesn’t deserve to be given any extra priveleges. It is a third world impoverished country with 70% of the population living below the poverty line. Any somebody besides Reuter’s left wing biased media needs to tell India that it is not in the same league as China which is also a permanent member of the security council. Russia is already a member of G-8. So India & Brazil can just go #$%^ themselves and yes- spend the money they waste on N-arms (aimed at India) & establishing themselves as world powers (which they are not) on feeding and clothing their destitute people! Whatever India, or the sycophant Brown or the radical left-wing socialist scheming Obama try – India (& Brazil) is and will remain an underdeveloped nation for quite some time – well below Italy, Spain, Austria, Sweden and numerous other European countries besides Germany & France and way behind Canada & Australia too!!!! So how do ya like it?!

Posted by Anton | Report as abusive