Leaders of the world’s 20 biggest economies gather for a summit in the French resort of Cannes against the backdrop of anaemic growth, rising debt burdens and mounting unemployment across advanced economies, as well as signs of a growth slowdown in key emerging economies.
Hopes are high that leaders will strike a grand bargain akin to the one the G20 reached at its London Summit in April 2009, which gave a momentous boost to flagging global growth and confidence.
But today, given a worsening eurozone crisis, limited economic flexibility, stark ideological divisions and rifts over policy, fears are growing that politicians lack the shared vision needed to prevent a deep and renewed global economic downturn.
KICK-STARTING GROWTH
Global leaders arrive in the French Riviera aware that the immediate priority will be for European heads of state to beef up measures outlined in Brussels last week, to convince markets that the eurozone debt crisis will not spread to larger economies such as Spain and Italy.
But a more profound challenge will be to find ways to kick-start growth. Ted Truman, senior fellow at the Peterson Institute for International Economics, says the stakes are high precisely because the backdrop has deteriorated sharply this year: “Almost regardless of what’s going on in Europe, one of the reasons why people are so worried about Europe is because the global economy is much weaker than people thought it would be a year or even six months ago,” he says.
But he adds that global leaders increasingly recognize the severity of the situation, and the importance of leaving Cannes with commitments to restore confidence and growth. “There is a greater consensus on the concerns about the global economy in all its dimensions ... so the priority attached to growth in the global economy has gone up,” Truman, a former assistant secretary for international affairs at the US Treasury, says.
Significant ideological divisions nevertheless remain among G20 economic policymakers over the appropriate path of policy to bolster growth.
Central banks in advanced economies have taken the lead through a mix of ultra-low policy rates and quantitative easing to boost liquidity and confidence. In recent weeks, the Bank of England announced a further round of quantitative easing, the European Central Bank launched another bond-buying scheme, while a number of senior US Federal Reserve officials have argued strongly in favour of yet more asset purchases by the central bank.
But whether monetary authorities can continue shouldering the burden of supporting growth and boosting confidence remains a thorny question. “You can debate whether quantitative easing is necessary or not, but you can certainly say that it will not be sufficient,” says Mohamed El-Erian, co-CEO of Pimco, the world’s biggest bond fund. “Central banks and monetary institutions can provide a bridge to a solution but not a solution itself.”
SHORT-TERM STIMULUS
Calls are growing for policymakers in advanced countries to put deficit reduction efforts on hold and enact further fiscal stimulus to forestall recession.
Daron Acemoglu, professor of economics at MIT, says that increasing the US’ average growth rate by 2% a year would mean that government tax revenues would be 49% higher in 20 years’ time than they are today, removing the need for drastic spending cuts in the short term. He says a similar logic applies for Europe. But he warns that policymakers are placing too much emphasis on addressing short-term fiscal crises, when the real priority should be kick-starting growth.
“There is a real danger that the economy on both sides of the Atlantic is heading towards a growth crisis, not a fiscal crisis, and I think that’s a much more severe problem,” he says. “Austerity [reforms] are sensible, but they have to be designed in such a way that they don’t interfere with the recovery of the European and the world economy. That’s the overarching economic point that has to be borne in mind.”
The IMF has given cautious backing to calls for short-term stimulus for countries with enough policy space to do so, provided such measures are accompanied by plans to slash deficits over the medium term.
“For those countries that have some room to manoeuvre, [fiscal stimulus] is not a bad thing to do,” Nemat Shafik, deputy managing director of the IMF, said in London last week. “But if you’re allowing more spending in the short term, you’ve got to be able to show how you will get that under control in five or 10 years’ time. Without a medium-term consolidation plan, the markets will really worry about what you’re doing.”
But finding the balance between short-term stimulus and medium-term deficit reduction won’t be easy. “The line that ‘we’re going to spend as much as we can with little oversight now, but in five to 10 years’ time we’re going to tighten our belts’ has no credibility,” says Acemoglu. “So [countries] should announce [deficit reduction] programmes now, but because they are post-dated, in the meantime roll out big jobs programmes and fiscal stimulus. That’s the most realistic political solution, but even that may not be very realistic.”
Others warn that a failure to prioritize growth could prove disastrous: “If everybody does fiscal austerity at a time when private demand is falling again, you’re going to have another global depression. We’re going to make exactly the same mistake like during the Great Depression, when we took away the fiscal stimulus too soon. That is a huge risk right now,” Nouriel Roubini, chairman of Roubini Global Economics, told Emerging Markets in a recent interview.
At the very least, the risk is of long-term economic stagnation in advanced economies. Says Acemoglu: “There is a real danger it will be more like Japan, or Latin America, where we’ll have 10–15 years of absolutely lacklustre growth or no growth. That’s not depression, but it’s still a disaster.”
A sustained period of extremely sluggish growth would have devastating effects on already high unemployment levels in advanced economies, he says. “Unemployment is a central [issue], and it’s neither purely short term nor purely structural. You really do need short-term growth to get unemployment down from 9.5% in the US and 20% in Spain,” he says.
NO ONE IS IMMUNE
Emerging economies won’t be spared the fallout of a growth slump in the West, experts say. Although developing Asia in particular might be better placed than before to withstand the effects of a decline in developed-market demand, it would be hit hard by a sustained rich country downturn.
“No one is immune; everyone is impacted,” says Gerard Lyons, chief economist at Standard Chartered.”Asia and emerging economies are not decoupled; they are better diversified in that they have more engines of growth in terms of stronger domestic demand and new trade corridors with other emerging economies. But even allowing for that better diversification, they are still clearly impacted.”
The onus is therefore on emerging market policymakers to play a significant role in resolving both the eurozone crisis and the restoration of growth.
“A downturn in advanced economies will subtract enough demand from the emerging markets that it will slow them down too, so they’ve got to accept that and then do what they can to mitigate it,” says Nobel laureate economist Michael Spence. “They have a very big stake in both the short-term and medium- to long-term restoration of stability and recovery.”
GLOBAL COORDINATION NEEDED
Policymakers in emerging nations have already expressed a willingness to play some part in helping resolve the eurozone crisis, most directly by backing proposals to increase the IMF’s firepower. But many believe they will have to go further and enact reforms aimed at resolving long-standing currency and trade mismatches.
Lyons says that in order to recast the global economy on a sustainable, long-term growth path, three concurrent developments are needed: deficit countries must save more; surplus countries should spend more; and undervalued currencies will need to adjust. Without a commitment to reform on the part of emerging as well as advanced economies, any such efforts will likely fail, he says.
“It is imperative that there is rebalancing in all three areas,” he says. “This requires leadership, to persuade people to do things that are not only in their own best interest but in the global interest.”
LOOKING FOR A LEADER
But with tensions on the rise in recent months between key G20 economies on major structural issues – in particular over currency valuations and trade protectionism – the lack of leadership or collective focus among global policymakers is ever more apparent.
“This thing cannot be solved at the national level because there are persistent global imbalances. So you have to solve it at the global level, but [that] requires coordination and people to trust the actions of the other side,” says Pimco’s El-Erian.
“The US is too weak to be the conductor in this orchestra; the G7 has the wrong membership; the G20 is still too new; and the IMF lacks legitimacy. So you have no conductor. In the absence of a conductor, people are going to play from different sheets of music. And for those of us that listen to this orchestra, it sounds incredibly incoherent.”
But not all hope is lost for progress emerging from the Cannes summit. The economic circumstances that policymakers face“ are more differentiated today than they were in 2009“, notes Truman.
“One of the positives of things like G20 summits is that they are action-forcing events, so G20 leaders will make an effort to get as close to a consensus as possible,“ he adds. “One would hope that leaders would convey enough consensus that there will be some reassurance that the global economy is not going to veer off into the ditch.”
THE NEW NORMAL
Whatever the case, rich countries are almost certain to face a bleak future of slow growth.
El-Erian, who coined the term “new normal” in early 2009 to describe a new economic reality characterized by extremely sluggish growth, persistently high unemployment and recurrent balance-sheet concerns in the West, and a period of prolonged outperformance by emerging economies, believes that his assessment “is now playing out”.
Emerging economies are likely to “outperform the West for some considerable time”, says Lyons, whereas the “scale of debt and amount of deleveraging needed” calls for a significant period of “sluggish” growth in advanced economies. For Europe in particular, “it’s a case of keeping your head above water rather than sinking,” he says.
But others paint a bleaker picture. For Roubini, an economist famed for correctly predicting the 2008 economic crisis, recession is not just unavoidable, it has already begun.
“At this point the debate is not whether we’re going to have a double dip or not; the double dip has started,” he says. “The only question is, are we going to have a mild recession that’s going to last for three quarters in advanced economies or whether we’re going to have a severe recession and another global financial crisis.”