The G-20’s Soporific Summer Summitry

There is a temptation to ignore the gathering of G-20 finance ministers in Moscow last week. Such summits typically feature a very particular sort of drama — pitched battles over the wording of a communiqué. The victorious sherpas earn their black belts in bureaucracy but have little impact on the broader world. I would not recommend anything so drastic as reading the communiqué produced at last week’s meeting, but summits can provide an occasion to check in on some important ongoing policy discussions.

Last week’s meeting in Moscow concluded with a call for emphasizing economic growth over austerity. With Chinese growth faltering, Europe perpetually slumping, and the U.S. Federal Reserve contemplating the limits of its quantitative easing, a consensus emerged that this was no time for frugality. This signifies at least a temporary vanquishing of the budget-conscious Germans by the stimulus-besotted Americans. More interesting, though, are some of the perversities of the underlying growth vs. stimulus debate.

This is a debate that was confused to begin with. Then, Ken Rogoff and Carmen Reinhart were found to have stumbled in their arithmetic and the discussion went right off the rails. To recap, Rogoff and Reinhart were celebrated for arguing that beyond a threshold level of debt (90 percent of GDP) growth would slow sharply. If that were true, then racking up very high levels of debt would suppress rather than stimulate growth; austerity might do the reverse. The unveiling of Rogoff and Reinhart’s error revealed that high levels of debt were still associated with slower growth, only there was not such a sharp turn at 90 percent. Nevertheless, the finding was taken as a license to party, figuratively speaking. For the sake of argument, we can set aside all the other studies that cautioned against excessive borrowing and embrace the turn against budget-balancing. Economies are slow, so let’s borrow!

Great. From whom?

For the United States, this is not such a problem. Treasury yields have risen, but the country can still borrow fairly cheaply. Yet the United States economy looks positively rosy compared to much of the rest of the world. What of countries like Portugal that were overtaken by the financial crisis? The Portuguese economy is supposed to contract by 2.3 percent this year and youth unemployment is over 42 percent. Surely, if a country needs a bit of stimulus, it’s Portugal. But the Wall Street Journal reports this week that Portuguese bonds have stumbled and borrowing costs have risen. In other words, no one seems very eager to lend to the country. One likely reason for lender reluctance is that Portugal’s debt just bubbled over 127 percent of GDP.

Surely Portugal’s European brethren can front the country some more cash, can’t they? Perhaps. But the euro area as a whole just crossed the erstwhile Rogoff-Reinhart threshold to 90.6 percent of GDP. If we take euro area economies in descending order of economic size, Germany has debt/GDP of 81.2 percent, France is at 91.9 percent, and Italy at 130.3 percent. No one is feeling especially flush. Italy would clearly be a recipient, not a donor and has had its own loud anti-austerity arguments. Even if the euro zone’s wealthier nations took pity on desperate countries like Portugal and Greece, Italy is substantially bigger and hence less affordable. This highlights the fundamental problem: If a new borrowing enthusiast cannot find a correspondingly enthusiastic lender, it is unclear how the rejection of austerity will have any effect.

What harm, though, if ministers gather and proclaim their devotion to growth (and motherhood and apple pie)? One of the problems in Moscow was that the push against austerity seemed a reversal of 2010 G-20 pledges in Toronto to cut borrowing. One might argue that there is a certain genius to the G-20 approach over recent years. If the leaders make enough contradictory pledges, eventually one of them will be honored, if only by accident.

Alternatively, and more seriously, one could note that there is not necessarily any conflict between short-term spending and longer-term fiscal rectitude. That, in fact, has been the IMF prescription, though short-term spending has been much more popular than longer-term entitlement reforms.

There is a broader danger here. At the onset of the global financial crisis, the G-20 was able to offer some much-needed reassurance to a badly-shaken world through its promises to set things right. If the group continues to iterate through empty or misguided pledges, ultimately people will succumb to the temptation to ignore the gathered leaders, even in a future moment of serious need.