Simon Johnson at The Baseline Scenario reports on the G20 meeting of finance ministers and central bank governors and discusses the dire situation in Europe.
The G20 Lets Us Down
Courtesy of Simon Johnson at The Baseline Scenario
I’m continually amazed by how easy it is for government officials to hoodwink most of the news media. All it takes is for a couple of leading finance ministers to get on roughly the same page, and we’re reading/hearing about “substantial progress” or “major steps forward.” If someone provides an articulate background briefing to a leading newspaper on the supposed debate within a group of countries, this becomes the dominant news story.
Saturday’s G20 meeting of finance ministers and central bank governors is a leading example. It was a disaster – we face what officials readily concede is the biggest financial and economic crisis since the 1930s, yet this conclave agreed on precisely nothing that will make any difference. If the G20 heads of government summit on April 2nd is a similar failure, we will be staring at the real possibility of a global catastrophe. Yet the spinning storytellers of the G7 have still managed to get much of the press peering in entirely the wrong direction.
For more on what would the right direction, take a look at my piece in Britain’s Sunday Telegraph.
The media coverage of the G20 finance ministers meeting this weekend was dominated by the apparent battle between those who support more fiscal stimulus and those who want to impose more regulations on the financial system.
This, we are led to believe, is the big debate facing the full G20 heads of government summit early next month: the US is pushing for a bigger global fiscal stimulus (2pc extra government spending from everyone, to be monitored by the IMF), while the continental Europeans are holding out for greater regulation. Gordon Brown is trying hard to cast himself as the broker for any apparent deal.
However, don’t be fooled by all this sound and fury. The rival agendas of fiscal stimulus and regulation are both red herrings at this point in time.
The reality is much less promising, for three reasons.
First, co-ordinated fiscal expansion made sense early in 2008, when it was first proposed by the IMF. But the severe downturn that followed the onset of financial panic last September means that very few countries can now afford to spend more or tax less…
Second, while the conventional official reluctance to discuss unpleasant truths is always awkward, during a major global crisis it’s downright dangerous. Across the industrialised world, the financial sector has become too large and too politically powerful…
Third, politicians keep repeating something along the lines of "we face a global problem that needs a global solution" – this was Gordon Brown’s refrain in Washington recently. But the most pressing problems in 2009 are not so much global as European…
…Almost all of Eastern Europe is in trouble and will need to borrow from the IMF; the massive over-representation of Western Europe on the IMF’s board suggests that this will end badly.
And that’s not all. The crash of real estate in Ireland, Spain, and the UK worsens bank balance sheets that are already damaged from losses incurred in the crazy casino that was the American mortgage market…
It gets worse. The US has banks that can plausibly claim they are Too Big To Fail, and this is bad enough – because it lets them get big bailouts. But Europe has banks that may be Too Big To Rescue – ask Iceland or, more recently, Ireland…
European countries face two types of future. On the one hand, countries that still control their own currencies can engage in creative monetary measures, pushing down the exchange rate and raising inflation; the Bank of England leads the way in this regard. Inflation will reduce debt burdens but of course comes with other costs. Think of it as the worst of all possible policy choices, apart from the alternatives.
And those most unpleasant alternatives are faced by Eurozone countries… Full article here.
Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He co-founded and contributes to economics blog the Baseline Scenario.
