Obama to blame: Euros Seem to Think So

Fiscal disarray is the least of the G20’s sins



By Clive Crook
Financial Times
June 27 2010 19:34




The first Group of 20 summit in November 2008 proclaimed a new era of “global solutions to global problems”. Less than two years later, with the economic crisis barely contained, the partners are at odds. Reaching agreement was not the main challenge in Toronto this weekend. They knew that was not going to happen. Mainly, they hoped to put the best face they could on disunity.

How much do these divisions matter? The main bone of contention in Toronto was fiscal policy. Here, I would argue, simple ineptitude seems to be a bigger problem than disinclination to co-operate.

In 2008 and 2009 it was obvious that powerful fiscal and monetary stimulus was necessary everywhere. When everybody wants the same thing, co-operation is easy. How easy? You would have got the same result without it. Last year, co-operation cost nothing and, as compared with the alternative, achieved nothing. In 2010 circumstances have changed. Some countries still have room for fiscal manoeuvre. Others have less and some have none. Co-operation is therefore more difficult – and, you could argue, more necessary.

In a world of suppressed demand, where cross-border flows of saving and investment need rebalancing, the textbook case for fiscal co-ordination is clear. Countries with external deficits and encroaching borrowing constraints should rein in fiscal stimulus; countries with external surpluses and untapped debt capacity should maintain or increase it. With agreement on which country falls under which dispensation, governments could optimise fiscal adjustment and support better-balanced growth. Disagreement, which is what we have, increases the risk of another global downturn.

In principle, optimal fiscal co-operation would certainly be nice. Looking around, though, one would happily settle for ordinary inward-looking competence. The real worry is that as the recovery stutters on there is so little sign of that.

Germany is being called a bad global citizen for tightening fiscal policy despite its external surplus and unstressed borrowing capacity. The criticism is fair. But forget the debilitating implications for Europe and the world: unforced austerity is bad for Germany (though it might be good politics for Angela Merkel). Britain’s new government has a much more serious public debt problem but its fiscal plans – which gave rise to much boasting in Toronto – also look needlessly severe.

Europe as a whole seems intent on one-size-fits-all austerity, despite limping output and very low inflation. Some countries have no choice but to curb their borrowing immediately. All should make a credible commitment to fiscal consolidation in the medium term: deficit hawks are right that if you wait until the bond market hammer comes down, you have waited too long. But with economies still so weak – remember Japan – this should not dictate a universal headlong rush to fiscal retrenchment.

Under these circumstances one could forgive the US for lecturing others on fiscal policy, were it not for the fact that (a) poor US financial regulation and inattentive monetary policy caused the crisis in the first place, and (b) its own fiscal policy is a shambles. President Barack Obama is telling other countries to maintain fiscal stimulus even as his own fades and the US Congress is denying his modest requests for extra spending. For this, Mr Obama himself is mostly to blame.

He and his allies in Congress bungled last year’s stimulus. A big package was needed, and was duly delivered. But its design was poor: too much spending on shovel-ready projects that weren’t; too little in tax cuts. It was seriously oversold, leaving voters sceptical that more stimulus would do any good. Worst of all, with public debt through the roof, the administration has failed to give the smallest sign of its exit strategy. Last week its budget director, Peter Orszag, disclosed his own. He said he was quitting; colleagues said (though he denied) that he was frustrated by White House indecision over medium-term fiscal control.

The complaint after Toronto is that nations are concentrating on their own economies and ignoring global welfare. So far as taxes and spending go, my reaction is: if only. Attending to strictly national demands would get the world most of the way to the budget policies it needs. In other areas, however, unilateralism is less productive and co-operation not just valuable but essential. Financial regulation and trade are the most salient cases. This is where the failure to get along really counts.

Uncoordinated financial rules are self-defeating because of regulatory arbitrage. In financial reform governments have, or ought to have, the same goal: systemic safety, domestically and internationally. There is no excuse for pursuing financial reform as if other countries did not exist. On trade, the calculus is subtler. Politics pushes for protectionism. Governments know that this approach is pure beggar-my-neighbour, collectively ruinous; some may even understand that the welfare-maximising policy is unilateral free trade. On either view, they need co-operation to make open markets politically feasible.

The G20’s performance in both areas, needless to say, has been lamentable. The US looks ready to pass its new financial regulation law – but agreement on the Basel III rules on bank capital, which are more important, has receded. As for the Doha round, what Doha round? The G20 richly deserves its bad press, but not for failing to co-ordinate fiscal policy. That is the least of its sins.

















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