By Philip Stephens
Published: June 25 2009 19:48
After the financial crash, the economic collision? History may well be kind in its judgment on the international response to the crisis in financial markets. Muddled it may have been, but governments did muddle through. Now the emergency has passed, however, policymakers look set on going their own ways.
We have seen plenty of policy mistakes and mishaps during the past year. The choreography of co-ordination was frequently ragged – even in Europe, where the habit of working together is supposed to be deeply embedded. That said, there was a surprising degree of co-operation, and notably so between rich and emerging nations. China in particular can claim it has been a responsible as well as a big player.
The Group of 20 leading nations is clumsy and imperfect, but has shown itself a better reflection of the distribution of economic power in the world than the old western clubs. The G8 group of rich nations now struggles to be taken seriously, its task not made easier by the present chairmanship of Italy’s Silvio Berlusconi.
The economic crisis, of course, is not over. The premature euphoria of recent weeks owes more to relief at meltdown averted than to real evidence that recovery is under way. Sensible policymakers are cautioning that the world economy could weaken again before it strengthens.
That said, the restoration of calm in the markets has been the signal for cracks to appear about what to do next. Governments are making different choices on financial regulation. Hopes that they might have been shocked into tackling the root causes of global economic imbalances are fading.
This autumn the G20 will gather for another meeting, this time in Pittsburgh under Barack Obama’s chairmanship. For all the US president’s political weight, few are predicting a breakthrough in global economic governance.
The problem is one of competing diagnoses and prescriptions as well as diverging national interests. The US and much of Europe, to take one example, are adopting different approaches to bank regulation. Last week saw the Obama administration unveil a package of measures that seemed to bear more of the stamp of Wall Street than of Main Street. Continental Europeans want tighter constraints on the erstwhile titans of finance. Britain, as is its wont, may end up stranded mid-Atlantic.
The differences reach beyond both the appropriate rulebook for financial markets and the inevitable disagreements between Americans and Europeans about the liberal quotient in liberal capitalism.
This was brought home to me the other day when I listened to one of the US administration’s top economic advisers. The official was speaking at a private gathering of international policymakers and scholars hosted by Washington’s Brookings Institution, Germany’s Alfred Herrhausen Society and the London-based Policy Network.
There were two possible threats to a sustained global recovery, the adviser offered. One was that the huge fiscal and monetary stimulus needed to rescue the financial system would lead the world back into 1970s inflation. Another was that the authorities would withdraw the stimulus too quickly, leading to the economic stagnation experienced by Japan during the 1990s.
Both were threats to be taken seriously, but as far as the US administration was concerned the balance of risks lay firmly with the latter. Without a surge in economic growth or a spike in commodity prices, fears of runaway inflation were overdone. To argue otherwise, one would have to believe in what the official caustically called “immaculate conception inflation”.
As for calls from all and sundry for a concerted effort to tackle global economic imbalances – code, as everyone knows, for the US current account deficit and the Chinese surplus – the US administration was relatively relaxed. The US deficit had already fallen sharply from its peak and the drop in the dollar’s value would continue to shift the country’s resources into exports.
It would certainly be welcome, the official avowed, if China and others did more to boost consumption; doubtless such issues would be the subject of intense discussion at international meetings. But in a world of mainly flexible exchange rates, there was no pressing need for formal agreements. “If some people wanted to wear blue shirts and others white”, that was fine, he said.
You can agree or disagree with this analysis. Many people in Washington as well as beyond America’s borders would dispute quite a lot of it. Republicans are not alone in believing that the soaring US fiscal deficit is a harbinger of future inflation. Likewise, the authorities in Beijing are in plentiful company when they fret about a weak dollar. As for the Europeans, quite a few of them do believe in immaculate conception inflation.
What struck me about the official’s presentation, though, was a sense of indifference – insouciance was another word that sprang to mind – about what other governments think. China may agonise about the impact of a further devaluation of the dollar on its $2,000bn of US Treasury bills. Europeans may worry that the US will seek to inflate its way out of its indebtedness. Washington will get on making its own economic policy as it sees fit.
Put crudely – and here I am adding my own interpretation to the official’s remarks – if the surplus countries do not boost demand in their economies, in so far as imbalances are a problem, a falling dollar will do the trick; and not much harm will be done.
Such economic unilateralism – and I do not intend here to absolve China or Germany from their responsibilities – sits uneasily with the multilateral engagement that is supposed to be at the heart of Mr Obama’s foreign policy.
Perhaps another top official in the administration would have told a rather different story. Perhaps Beijing, Berlin and the rest need to be confronted with the alternative if they are to be persuaded to shoulder a share of the burden of adjustment. The danger is that, without the glue of shared adversity, governments will fall to bickering again.
It seems to me that two of the economic policy lessons of the financial crash need to be held on to. They may be obvious but they merit restating: the markets will not fix things of their own accord; and, though undoubtedly time-consuming and tedious, international co-ordination is the vital response to interdependence.
Copyright The Financial Times Limited 2009
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