A sense of normalcy should not lead to complacency

Reading the April Communiqué of the Finance Ministers and Governors of the G20, it seems this sentence from the September conclusions of the G20 leaders’ summit in Pittsburgh has been forgotten. In their statement, the ministers legitimately praise the strengthening of the recovery and they correctly emphasise that a multi-speed recovery calls for differentiated policy responses. But they do not deliver on the leaders’ commitment to put in place a Framework for Strong, Sustainable and Balanced Growth which the Pittsburgh statement described as “a compact that commits [the] to work together to assess how [their] policies fit together, to evaluate whether they are collectively consistent with more sustainable and balanced growth, and to act as necessary to meet [their] common objectives”. The April communiqué refrain from addressing specifics and it is closer in tone and substance to the many elusive and ineffective G7 statements issued over the years prior to the crisis than to the statements issued by the G20 since the
London summit in April 2009.

Part of the reason is admittedly that the establishment of the mutual assessment process that underpins the framework was conceived as a gradual process. As agreed in St Andrews in November last year, in a first step the G20 members provided to the IMF information on their medium term prospects and policies, to the extent possible in accordance with a commonly agreed template (not all countries could in fact provide the required information, because they did not have corresponding domestic policy frameworks in place). The second, current step was agreed to be an initial consistency check by the IMF, consistent with the Spring 2010 World Economic Outlook, that would both serve as a dry run of the mechanism put in place and as a first exploration of the policy issues involved. The third step is still to come, as ministers, with the support of the Fund, will report to the leaders and propose policy options for the G20 leaders’ Toronto meeting in June. The intention behind gradualism was both to ensure technical soundness and to give time to all participating countries (or at least to the most important of them) to develop ownership in the process.

Another motive for caution is that the economic outlook has not developed in the way that was expected (and feared). In Autumn 2009, the Fund expected world growth to be 3.1% in 2010, and US growth was projected to be a meagre 1.5% (see the October 2009 WEO). Now world growth is expected to be 4.2%, with the US reaching 3.1%.

The main question behind the G20 growth framework – who will substitute the US consumer as an engine for world demand growth? – has therefore lost urgency if not medium term relevance. The new projections see growth strengthening, despite lingering weaknesses in the euro area and in Japan.

The IMF also projects global imbalances to remain stable, with the US deficit at a markedly lower level than in the mid-2000s. Even the Chinese surplus is expected to represent a lower proportion of GDP (6.2% of GDP in 2010 and 6.5% in 2011, against 11% in 2007), even though China’s growing weight in world GDP implies that its surplus projected to increase in
proportion of world GDP. So the G20 find itself in the uncomfortable situation to have made preparations for a scenario that is not the one it sees now unfolding.

It must finally be recognized that international coordination centred on current account imbalances suffers from the fact that economists lack a proper measurement of what constitutes an undesirable imbalance, at least from the global viewpoint. No one disputes that some countries should run current account surpluses and others deficits nor that at a time when global effective demand is wanting countries with ‘large’ current account surpluses should make efforts to spur demand. But the fact remains that there
is no ready-made criteria that permit to determine at what level surpluses or deficits can be considered excessive from a global viewpoint, especially when global effective demand is returning to normal.

All this is however no justification for watering down already the commitments entered into by the leaders. To take only one example, the Pittsburgh statement indicated that ‘as part of our process of mutual assessment, G20 members will agree on shared policy objectives’, adding that ‘these objectives should be updated as conditions evolve’. The April ministerial communiqué, however, gives a list of objectives that are
valid for all countries at all times – close output gaps, converge on potential growth, increase the potential growth rate, ensure sustainable public finances and financial stability, be resilient, achieve consistency with social and environmental goals, do not generate persistent and destabilizing internal and external imbalances, etc..

Clearly, those objectives will not need to be ‘updated as conditions evolve‘. It is hard to believe that this is the kind of targets the leaders had in mind when they agreed on the Pittsburgh statement.

International coordination is admittedly not needed at all times. In view of the diversity of situations and potentials in the world, policies in normal times are better left to national decisions. But it is too early to claim that normal times are back. There are still major risks ahead, the growth scenario outlined by the Fund is far from certain, and no one can be certain that imbalances won’t quickly reach levels comparables to those observed pre-crisis. The most ambitious international coordination exercise in at least 30 years should not be reduced to a mere diplomatic exercise in communiqué drafting.