Divided We Fall
As the global economic recovery staggers, countries are lurching toward unilateral solutions that will only make us all worse off. It's time for the world to come together and produce real answers.
Finance ministers and central bank governors meeting in Washington, D.C., this weekend have an enormous task ahead of them: They need to act with great urgency to promote multilateral solutions to today’s pressing economic problems — from the sluggish recovery to persistent high unemployment and heavy debt loads — while moving to halt the disturbing trend towards unilateral moves on macroeconomic, trade, and currency issues, as well as key aspects of financial system regulatory reform.
Why sound the alarm now? The threats posed today by slowing growth in mature economies, the risk of deflation, global imbalances, and regulatory fragmentation may not be as dramatic as those faced at the very height of the financial crisis, but they are equally compelling — and much more intractable. Without timely and resolute action from the world’s leading governments, they will sap the economic recovery and further undermine market confidence.
The United States, the Eurozone, and Japan face the prospect of sluggish GDP growth in the years ahead, which my organization, the Institute of International Finance (IIF), now projects at just 1.7 percent for 2011 following 2.4 percent growth in 2010. A number of countries, notably Greece and Ireland, now confront major fiscal and structural adjustment challenges, while others, including the United States, cannot be complacent lest the markets turn on them as well. Threats of trade protectionism, plus unilateral actions on the exchange-rate front, such as the heavy interventions of China, Japan, and Switzerland in the currency markets — not to mention the retaliatory tariffs recently passed by the U.S. House of Representatives — endanger growth prospects and could further depress financial market confidence.
The chaos must stop. Instead, a core group of the world’s major economies should convene urgently to broker agreement on these sensitive macroeconomic and exchange-rate issues, leading to the broader support and engagement of the G-20 at the forthcoming Seoul summit in November. Only such a core group of countries could determine a package of politically difficult tradeoffs, for instance China revaluing its exchange rate while the United States moves to define a clear and credible plan for tackling its alarming deficits. Such a plan would reassure markets and ward off upward pressure on long-term interest rates, while also allowing room for maneuver if further or continued fiscal stimulus is deemed necessary in the short term.
Of course, the actions that the core group, whether it’s the G-20 or some other forum, takes will have a profound impact on all other countries. Emerging markets are demonstrating strong growth today (the IIF projects 6.8 percent GDP growth for the group this year and a slight moderation to 6 percent next year), while also absorbing substantial inflows of foreign private capital (the net inflows to emerging economies will be $825 billion this year and then climb modestly in 2011, the IIF now estimates). If progress is made in multilateral negotiations on major currency issues, emerging markets receiving strong capital inflows will be in a better position to promote domestic financial stability in a comprehensive manner, rather than resorting to uncoordinated measures such as capital controls.
Critical efforts to reform the rules that govern the world’s biggest banking institutions, which the IIF represents, are now unfolding. The Basel Committee on Banking Supervision and the Financial Stability Board — the international groups of governmental regulators that establish the global rules of the financial system — have made important progress, notably with key decisions in July and September that have help to set the base for a more stable global financial system. Key Basel committee leaders are now proposing key capital and other requirements for banks for acceptance by the G-20 alongside a sound timetable for implementation. However, in recent days, some national authorities have indicated that they intend to place additional regulatory requirements on firms or to accelerate implementation, and moves in this direction are in some cases already being activated by market pressures. That’s dangerous: Unilateral national actions could well undermine the carefully constructed Basel accords, contribute to a fragmentation of the global financial system, and add to the economic costs of reform, so further endangering economic recovery.
Without doubt, the momentum for policy coordination has faltered in the post-crisis environment, allowing a worrying trend toward uncoordinated, unilateral policy actions to emerge. The senior officials gathering in Washington this weekend need to ensure that their actions, together with those that lead to the Seoul summit in coming weeks, deliver a set of consistent and mutually reinforcing measures to address the problems that I have highlighted here. A communiqué of platitudes risks further undermining market confidence.
Indeed, our long-term prosperity depends critically on the ability of world leaders to make politically difficult decisions at a time when the global economy is still vulnerable on so many fronts. It’s time to step up.