The G-20 Summit and Beyond

As the G-20 Summit gets underway in Pittsburgh, what should we hope to hear from the G-20 leaders?

• That they are prepared to continue supporting economic and financial sector recovery through appropriate monetary and fiscal policies. While the G-20 economies are showing signs of improvement, we are not out of the woods yet. Recovery is expected to be weaker than usual, which makes the economy vulnerable to economic or financial surprises. Plus, the risk of a double dip recession remains.
• That they will take steps to rebalance growth as their economies recover. For the U.S., this means greater savings (by households as well as the government, since budget deficits reduce savings), and a shift from a consumption-driven to an investment-driven economy. Without these changes, growth will not be sustained and our standard of living will be eroded.
• That they will adopt smarter financial sector regulation, so that risk (innovation) and soundness are better balanced. In a sound marketplace, financial firms must pay for performance - that is, market players should be rewarded for innovation on the upside but they should also take a hit for the downside. A two-way street is what markets are all about.
• That they will support fiscal recovery plans once the economies are on a sounder footing. For the U.S., a fiscal recovery plan could take the form of a credible five to ten year fiscal consolidation (deficit reduction) plan, which could be announced before it is implemented. Taxpayers and other creditors would be reassured about U.S. fiscal management going forward.

But, in the end, is the G-20 really relevant? The importance of the G-20 can be seen in the global economic turnaround currently underway. Global stimulus has made the effects of domestic stimulus in the U.S. and elsewhere stronger. In the absence of global stimulus, world trade would have declined even more and countries may well have adopted beggar-thy-neighbor policies, an important contributing factor to the world and U.S. depressions of the 1920s and 1930s.

So, G-20 dialogue and coordination must continue to take place in Pittsburgh and beyond. As global coordination has played a critical role in stabilizing the world’s largest economies, it must play a key role in ensuring that recovery takes place and that growth is sustained.