The G20 tees up another crisis

By Felix Salmon
June 28, 2010
this one -- an interminable 27-page effort from the G20 which only serves to underscore the fact that when they can't agree on what to say, bureaucrats are very good at making up for it with astonishing quantities of sheer blather:

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I’ve rarely seen as much unanimity regarding an important communiqué as I have around this one — an interminable 27-page effort from the G20 which only serves to underscore the fact that when they can’t agree on what to say, bureaucrats are very good at making up for it with astonishing quantities of sheer blather:

Measures will need to be implemented at the national level and will need to be tailored to individual country circumstances. To facilitate this process, we have agreed that the second stage of our country-led and consultative mutual assessment will be conducted at the country and European level and that we will each identify additional measures, as necessary, that we will take toward achieving strong, sustainable, and balanced growth.

A “consultative mutual assessment”? What could possibly go wrong?

As Chris Giles points out, agreeing on “growth-friendly fiscal consolidation” is easy, because it’s actually meaningless. And so the G20, which is meant to play a crucial international coordinating role, is now just a shop for different heads of state to arrive at a form of words seemingly designed to constrain them as little as possible.

Mohamed El-Erian writes:

The outcome of the G20 is a confirmation of what many expected and feared-namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world…

The communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms. The result is what game theorists label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.

In English, the U.S. is going to stay on its borrow-and-spend course, while Europe sees huge fiscal cuts. That, we could do without the G20. And it guarantees that the global imbalances the G8 and G20 have been so worried about since long before the financial crisis are going to get worse rather than better. There’s no solution in sight, which almost guarantees that the world is going to see another crisis, this time surrounding U.S. interest rates and the dollar rather than credit. The only question is when.


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Sharp analysis and one of your very good posts. It will be maddening when politicians claim that the next crisis was unforseeable and unexpected.

Posted by DanHess | Report as abusive

Could you write a little more about what you mean by a crisis surrounding U.S. interest rates and the dollar?

Posted by jgould | Report as abusive

1.The US keeps spending and hopefully their creditors keep accepting that.
2.Europe South has spend too much before and should get their things in order even spending more would not help, they are simply not-competitive.
3.Europe North (major part GDP-wise) looks to come out of recession and will cut spending (which is still in the region of 6to7% of GDP deficit. And will try to pay not more for the Southern countries as they already did. If other countries want to give the PIIGS a good dose of Keynes the Northern countries will be extremely thankful for that.
4.So first say 5 to 10 years in the Eurozone:
North 1.5-2.0% structural growth (around 45% GDP wise);
South minus 1.5to2% (35% GDP wise);
France 1.0 % (20%).
Overall say 0.5%to1.0% growth.
5.Major EM will do fine may be not 10% plus but not too much different from pre-crisis.
6. So providing The creditors of the US don’t make problems there will not be another big recession.
Unless something else goes terribly wrong, like:
-second housing bubble in the US;
-first bubble in Europe;
-bankingcrisis in Europe;
-warfront some crazy North Koreans.
7.House prices are still pretty high in Europe and deleveraging will push prices likely down. However with European politicians you sometimes worry that they don’t have a(n economic) brain at all. In eg Holland they are discussing at this moment abolishing the mortgage interest deduction and with an average taxrate of say 40%, makes financing more expensive. Prices ar roughly 30% higher than in Germany were they have a more limited deduction. 30% would only in Holland mean 250 bn Euro loss, bringing alot of private people in problems and subsequently banks and the government which has guaranteed the most vulnerable mortgages and cannot let the banks fail.
I doubt if the proposed stresstesting is really well comtemplated. If a bank fails, Central Banks will most of the time have to step in and/or the resp. country’s government and half of them have problems with their credit=line.
8. World will have changed. EM up, US slightly down, Europe considerably down. That all had to happen anyway only is speeded up.

Posted by Rikh | Report as abusive

How to go from G-two-oh to G-duh-no in seconds flat?

Keep giving tax breaks to politicians. They lost me at “Our efforts to date have borne good results.”

Posted by HBC | Report as abusive

The likes of Paul Martin (no, not the hockey player) was needed at the table. A leader with experience globally and with economic savvy seldom found in a head of state. (he wasn’t perfect but he was smart as hell)

He could reach out to the other leaders and instill trust and that was missing. He conveyed that you have to reconcile the past to understand where you are going and he had a way of showing the road map for convergence of ideas and ideals for global interest. Seriously.

I am a centrist (not a fence sitting one) so not spouting partisan views. His policies, regulations and fiscal responsibilities are the reason why Canada is, so far, still in such good economic shape, so he deserves a nod.

No one wanted to put on the black and white hat (our present Prime Minister included) and I was hoping Obama might lead the way. Sadly, he has to be a puppet of his wallstreet economists. It has returned to bobbing heads with insular protectionist views.

They all made some commitment to some deficit reduction, but I am nonetheless hunkering in for the next crunch which will culminate in the next 2 years unless there is deficit reduction now rather then later.

Growth-friendly-debt-reduction is a very cute sound bite, but fiscal sustainability requires more then eloquent speech. There will be no bailout package for the USA. Belt tightening means you can still burst out a bit at the seams, but it makes you aware you need to keep sucking in your gut until you lose the weight. (and tough noogies if you hate my analogies)

Posted by hsvkitty | Report as abusive