Hopes for any sort of meaningful agreement at the meeting of the G20 in Seoul today have more or less died. The unity that world leaders exhibited in London last year, when the global economy was on the verge of collapse, has now dissipated. Part of the problem is that, since the prospect of total disaster has receded, so has the sense of urgency. Narrow national interests have reasserted themselves. But the bigger impediment to progress is the fact that some of the main protagonists who will gather in the South Korean capital have fundamentally different views on how the global economy works (or ought to work).
Overshadowing the meeting is the US Federal Reserve's decision last week to inject a further $600bn into the American economy. Chinese, German and Brazilian policymakers suspect that this is an attempt to weaken the dollar, with the ultimate objective of boosting American exports. They also scold the US for failing to slash its budget deficit as quickly as other indebted nations.
American policymakers, by contrast, see China artificially boosting its own export sector by holding down the value of its currency through vast state purchases of dollars. And Washington has called on nations with trade surpluses, such as China and Germany, to stimulate domestic demand, rather than rely on already indebted nations to pick up the slack in demand in the global economy.
Britain stands between the two. David Cameron has enthusiastically joined the austerity bloc when it comes to reducing public spending at home. But the Prime Minister warned Beijing this week of the destabilising effects abroad of its domestic over-saving. And his Chancellor has supported the Federal Reserve's latest round of monetary loosening.
Those nations arguing for tight money and fiscal tightening from America and others should be careful what they wish for. The likes of Germany and China, which rely on exports to drive their growth, will suffer if their customers experience economic stagnation. So will those emerging market economies, such as Russia and Brazil, that rely on booming global demand for raw commodities.
By criticising stimulus in the US and elsewhere, these nations also risk cutting off their nose to spite their face. Nations with trade surpluses tend to be creditors of nations with trade deficits. Unless deficit nations are allowed to earn their way back to economic health through higher exports, those creditors will not get their money back.
Budget deficits in high-income countries certainly need to be reduced. But this fiscal consolidation must be done at a pace that allows these countries to sustain growth and reduce unemployment. And just as nations with trade surpluses need to save less, those with trade deficits do indeed need to save more. The problem is that one cannot happen without the other.
Yet the austerity-preaching, mercantilist bloc refuses to accept this economic analysis. For them, economics is a morality play in which every nation can cut and save its way to renewed prosperity. And the two sides appear to be moving further apart, rather than closer. The fact that prolonged monetary looseness in the US has failed to result in the inflation predicted by the austerians only seems to have made their convictions stronger.
In this context, it is impossible to envisage progress on reducing the trade and capital flow imbalances that are damaging the prospects of sustained global growth. A sensible plan by the US Treasury Secretary, Tim Geithner, to limit trade surpluses and deficits has already been dismissed. Leaders in Seoul delude themselves if they imagine that the danger to the global economy has passed. The price of their disunity is looking increasingly likely to be prolonged stagnation.Reuse content