The G-7 Is Dead. Long Live Jackson Hole.
This year’s summit of the leading industrial nations will be the most dysfunctional ever. Do the world’s central banks have the firepower to save the global economy?
G-7 summits are typically precooked. This year’s gathering in Biarritz, France, was predoomed. Even before it began, the meeting of the world’s leading industrial nations was rendered even more irrelevant than G-7 summits usually are when the host, French President Emmanuel Macron, announced that for the first time in the institution’s history there would be no final communique. The countries had that little to agree on, the world economy be damned.
Macron mostly blamed U.S. President Donald Trump, who blew up last year’s summit in Canada—and its communique—when he departed early in a huff. (Macron said it would be “pointless” to issue a joint statement this year because “President Trump won’t agree.”) And while Trump is certainly the main disrupter, having rendered toxic what was once vanilla—traditional G-7 statements opposing protectionism (which Trump favors) and addressing climate change (which Trump dismisses)—others are poisoning the well, too. Trump’s neonationalist tag team partner Boris Johnson, the new British prime minister, is demanding a makeover Brexit deal that the French and Germans probably won’t give him. The French and Germans themselves are at odds: Macron and Chancellor Angela Merkel don’t agree on basic issues such as fiscal stimulus for Europe and (possibly) Brexit terms.
So the markets are paying little attention to the dour mood in sunny Biarritz. Instead, they are focused on Jackson Hole, Wyoming, where the world’s major central bankers are discussing interest rate cuts and other counter-recessionary measures this week. Federal Reserve Chairman Jerome Powell, in his much-anticipated speech on Friday, signaled a measured willingness to do more rate cuts—saying he wants to “sustain the expansion”—and European Central Bank President Mario Draghi is mulling more stimulus for the seriously slowing European economies. Though the outgoing ECB chief did not come to Jackson Hole, other representatives of the ECB and major central bankers were there, and overall it could end up being the most significant such gathering since 2014, when Draghi indicated a massive quantitative easing program was on the way. Moreover, Draghi’s anointed successor, former International Monetary Fund chief Christine Lagarde, will be highly inclined to coordinate with the Fed, having lived through the U.S.-generated financial crisis and Great Recession as French finance minister.
The problem, however, is that the central bankers in Jackson Hole who are trying to save the global economy may be at war with the politicians in Biarritz who seem willing to let it sink. And if things keep going this way, the politicians may win, thus triggering a global recession, simply because the central bankers’ toolbox is far more depleted in an era of rock-bottom interest rates.
In other words, the people who know what needs to be done to offset recessionary trends and are ready to coordinate policy to do it—the Jackson Hole crowd— are also largely without the power to make it happen, especially since their annual retreat has no formal policy role. Meanwhile the ones who do possess that power—the politicians in Biarritz, with oversight over nearly 50 percent of global GDP and their budgets—appear incapable of agreeing to a common policy, never mind a communique. Trump started it all with his multifront trade war, but Germany could also speed recession along with its bias toward fiscal austerity.
Thus the market expectation is not that anything useful will come out of the G-7 but that a new spat among the leaders could only further roil global markets. “It’s not like a lot of significant things have been getting accomplished there in the last decade anyway,” said Harvard scholar Daniel Tarullo, who has served both as a G-7 “sherpa” and a Federal Reserve Board governor. “Maybe it’s only a bit of an exaggeration to say, borrowing monetary policy lingo, that this G-7 has very little upside risk but some greater measure of downside risk.”
Even the G-7 leaders are looking to the central bankers to save things: Faced with a slowing economy heading into an election year, the U.S. president keeps hammering Powell for further rate cuts—on Wednesday, Trump also suggested that the United States was losing out in his trade war because Germany was paying negative bond interest on its sovereign debt.
But while Powell signaled more cuts, there is only so much he can do. The better answer, experts say, lies in a coordinated fiscal stimulus that almost certainly won’t be forthcoming from Biarritz. While the U.S. government is spending wildly, Germany, Europe’s largest economy, is continuing to hold out institutionally and constitutionally against deficit spending. As the New York Times columnist Paul Krugman put it earlier this week: “The whole world has a Germany problem.”
“The mainstream consensus is that fiscal policy should be the main lever right now. Countries like Germany, the Netherlands and Switzerland could engage in that,” said Adam Posen, president of the Peterson Institute for International Economics.
Much will depend on whether the G-7 partners can move Merkel on this issue—and there are some signs that the Germans, along with the Dutch, are shifting toward more government spending. That is considered a welcome contrast to the euro crisis of 2010, when harsh austerity ruled and nearly upended the eurozone. But market players have few hopes for the G-7 itself, which has long been a troubled, fading institution whose problems predate Trump. Since it began as an informal chat about exchange rates in the White House library in 1973—ascending to a ministerial meeting at Rambouillet, France, in 1975—the G-7 has only rarely enjoyed instances of successful policy coordination.
Ironically, the G-7 began as an institution during a previous era of trans-Atlantic suspicion: It was largely a response to the shock of U.S. President Richard Nixon’s break with fixed dollar exchange rates, the so-called Bretton Woods system—which itself was partly inspired by Nixon’s almost Trump-like suspicion that the rest of the world was economically taking advantage of the United States.
“Today we’re experiencing something very similar,” said Lawrence Goodman, the president of the New York-based Center for Financial Stability think tank. He added that the G-7 leaders would be smart today to have a “candid exchange” rather than “pushing forward a banal communique” anyway.
Yet any such exchange is unlikely to produce agreement, signaling yet again that the G-7 may have outlived its tenuous beginnings and Cold War-era heyday. Its first major coordination effort at the summit level, in 1978, even presaged some of today’s mistrust across the Atlantic. Initially orchestrated by then-West German Chancellor Helmut Schmidt, West Germany and Japan agreed to stimulate their economies in return for U.S. agreement to decontrol domestic oil prices—but the German expansion created so much inflation that Schmidt eventually lost his job. The end of his political career thus only reinforced, to the Germans, the virtues of austerity.
Indeed, in recent years perhaps the G-7’s only significant policy impact has been to kick out Russia—which had been a provisional member from 1998 to 2014—after President Vladimir Putin seized Crimea. And the biggest news this year may well be Trump’s push to bring Russia back in. But that will do little to affect the world economy. Having been overtaken by the G-20 meetings and rent by existential doubts over the coherence of the West—trends vastly accelerated by the Trump era—the G-7’s virtual irrelevance this year in the face of a troubled global economy could well be its death knell.
And that’s why all eyes will be focused, somewhat desperately, on Jackson Hole .
Update, Aug. 23, 2019: This piece was updated to include details of Federal Reserve Chairman Jerome Powell’s Friday speech.