So they’ve gone and done it. Even though the G-20 called the recovery “uneven and fragile” in the final declaration from its weekend confab in Toronto, the advanced economies also pledged to at least halve fiscal deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. The statement read:
Recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation.
So how will the G-20’s position impact the rebound? Though there is no clear consensus among economists on whether or not fiscal retrenchment will sap the recovery, I think the way the G-20 is going about the process can only be negative. Here’s why:
The problem is that the G-20 countries aren’t fulfilling other aspects of their program that would act as a counterweight to the promised fiscal adjustment and ensure the global recovery keeps humming along. For example, the declaration warned that budget cutting has to be closely matched to a rebound in the private sector and coordinated across countries:
The path of adjustment must be carefully calibrated to sustain the recovery in private demand. There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery.
But isn’t that exactly what the G-20 is calling for, a “synchronized” retrenchment across the developed world? By putting in place a promise that all industrialized nations dramatically cut their deficits, the G-20 has set in motion the very rush to the exits that it says is a danger. I agree with the American position on the matter, that more or less got snuffed out at the summit, that countries that don’t suffer from severe sovereign debt issues or large fiscal deficits (whether in the emerging world, like China, or the developed, like Germany) should delay or slow their fiscal adjustment in order to sustain the global recovery and help those other nations that can’t wait to cut their budgets (Greece, Portugal). But that’s not happening. Germany is leading the charge on fiscal austerity instead of coming to the aid of its neighbors and stimulating Europe’s economies.
The other promise made at the G-20 to keep growth going is also likely to get ignored. That’s the one about rebalancing the global economy. The declaration read that fiscal adjustment “should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path.” Some members of the G-20 with large current account surpluses are at least making an effort (like China) or recognizing the need for change (like Japan). But others – and I’m thinking Germany here – seem to simply revel in their surpluses. The process of rebalancing is not happening quickly enough to counteract the drag on the global economy from fiscal cutbacks.
So in the end, the G-20 only set targets for the one factor that can hurt the recovery – fiscal adjustment – while not properly coordinating those efforts or holding its members to clear guidelines on the rebalancing that could support growth. That sounds like a recipe for a slower rebound from the Great Recession.