The centrepiece of this week's G20 meeting in Pittsburgh was a welcome capitulation to reality. The participants agreed that the G20 will henceforth replace the G8 as the central forum for overseeing the global economy. They also sanctioned a redistribution of power within the International Monetary Fund, giving a greater voice to developing nations.
The economic slump and its aftermath have confirmed the status of China, India, Brazil and others as the new powerhouses of the global economy. Yesterday's communiqué is a sign that the European and North American club that has dominated global economic forums for half a century has finally recognised this shift.
The other achievement of the meeting was some welcome steps forward on regulating global finance. There was a confirmation that private banks will be required to hold more capital to ease the need for them to raid taxpayers' wallets when their investments turn out to be bad. And there will also be stricter regulatory oversight of the bonuses paid by banks to their employees and executives. France and Germany were accused of populism in pushing the issue of bankers' remuneration up the agenda in Pittsburgh. But they were right to do so. In the years of the boom, financial sector workers, incentivised by vast bonuses for short-term profits, helped to pump the system full of risk. Moreover, France and Germany were right to stress that now is the time to reform finance. To wait for the banks to begin blowing a new speculative bubble would have been the height of political irresponsibility.
Yet, despite these forward steps, the G20 also failed to engage with two of the largest and most complex problems afflicting the global economy. The first is the fact that some of the world's largest banks have emerged from this crisis as taxpayer-guaranteed deposit-taking institutions welded to giant trading casinos. It was probably too much to expect the G20 to announce a mandatory split between retail and investment banks, but there should have at least been some recognition of this "too-big-to-fail, too-big-to-save" problem.
Second, the global economic imbalances that contributed significantly to last year's meltdown were barely mentioned in the communiqué. For the past decade, the likes of China, Germany and Japan have been running huge trade surpluses and the US, Britain and Mediterranean countries large deficits. These trends are two sides of the same coin. To put it crudely, their excess national savings are our excess national borrowings. Floods of these savings, particularly from Asia, drove down long-term interest rates and helped to blow up the disastrous debt bubble that burst spectacularly last autumn.
Over the medium term, deficit countries need to save more and surplus countries need to increase their domestic consumption. At the moment, some of those surplus countries are not even prepared to acknowledge that there is a problem. That is worrying because unless these imbalances are reduced, the world could be heading for a period of protracted low growth, or worse, a repeat of last year's meltdown.
The reorganisation of global regulatory and supervisory structures announced yesterday gives reason to hope that world leaders and financial authorities can return to these problems in time. They need to – because the work necessary to chart a course towards a more stable economic future is a long way from complete.