The G-7 disappoints again
By Mohamed A. El-Erian
The opinions expressed are his own.
Unlike recent G-7 meetings of finance ministers and central bankers that were essentially ignored, there was quite a bit of interest in the one held over this past weekend in Marseille. That interest turned out to be misplaced, however, as the G-7 delivered little of substance yet again.
Once more, the G-7 issued a communiqué whose disappointing lack of content contrasts sharply with the deteriorating health of the global economy, the intense risks ahead, and legitimate policy confusion. As an illustration, try reconciling the G-7’s “catch all” wording on fiscal policy — “we must all set out and implement ambitious and growth-friendly fiscal consolidation plans rooted within credible fiscal frameworks” — with the two strikingly opposing views expressed last week by Germany’s Finance Minister and the U.S. Secretary of the Treasury.
It is not just that the G-7 disagrees on policy prescriptions; the group failed again to converge to the type of common analysis that lies at the root of any coherent policy formulation.
Neither the global economy nor the financial markets can wait for the G-7 to get its act together — especially as the world’s three main economic areas each face a set of mounting challenges.
With structural impediments to both economic growth and the safe de-levering of excessive indebtedness, America’s economy is succumbing to the cumulative impact of policy shortfalls and political dysfunction. If President Obama’s speech from last Thursday fails to act as a dramatic economic and political catalyst, it is just a matter of time before America tips into another recession, unemployment rises even further, and a growing number of households and small companies are forced into bankruptcy.
On the other side of the Atlantic, Europe’s dithering policy response means that the functioning and institutional integrity of the Euro-zone are now threatened by more than just the troubled sovereign credit of peripheral economies. The European financial system is under enormous pressure as markets legitimately worry about both bank capital inadequacy and the continuous deterioration of asset quality.
All this puts the emerging economies in a tough policy position. With strong balance sheets and growing domestic resilience, they have the unusual historic ability to act counter-cyclically to stimulate internal demand and, thereby, insulate their populations from the West’s malaise while allowing for a more orderly global rebalancing.
Yet the incoherence of policies in America and Europe translates into less inclination for emerging economies to do so. Indeed, they may well opt instead for greater self insurance and, in the process, become another pro-cyclical driver for a weakening global economy.
With these issues continuing to fester, attention now shifts from this weekend’s disappointing G-7 to the IMF/World Bank meetings in Washington in two weeks and the subsequent G-20 Summit in France. The hope is that the former can lead to a common analysis of what ails the global economy, and that the latter allows for better policy formulation. In the meantime, look for markets to fret about the worrisome global economic outlook and a depressing lack of global policy coordination.
The G-7 is fortunate that it is not required to justify the expenses of its meetings in terms of what is achieved. If it had to, these meetings would be more decisive and/or less frequent.