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G20 Hedges on Debt-Vs.-Growth Policies

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
June 28, 2010

G20 Hedges on Debt-Vs.-Growth Policies - g20-hedges-on-debt-vs-growth-policies


The communiqué produced by the G20's Toronto summit on June 27 mustered all the blandness that is typical of such documents. The leaders committed themselves to "strong" growth, pleasing advocates of stimulus spending. They committed themselves equally stoutly to the opposite objective, declaring that growth should be "sustainable"—code for the need to cut stimulus spending and focus on deficit reduction.

The two concrete targets in the communiqué are scarcely more exciting. The leaders say they aim to cut budget deficits in half by 2013 and stabilize the ratio of public debt to GDP by 2016. But these goals are couched as hopes rather than firm commitments. And most G20 economies already aim to meet those targets anyway.

There is much worthy language in the communiqué stating that growth should be "balanced." But if this statement means anything, it must be that China and Germany, the two big economies with excess savings, need to contribute to global recovery via continued stimulus. China, admittedly, is doing its part. It has cut its trade surplus sharply, and has begun to show some willingness to allow its currency to rise. But Germany is a different story. Going into the summit, Chancellor Angela Merkel was the chief advocate of budget retrenchment—even though Germany's contribution to a balanced global recovery should be to run large deficits so long as global growth looks tentative.

The communiqué also hedged its bets on the question of how government debt burdens should be controlled. To stabilize their debt-to-GDP ratios, countries can cut their borrowing. But as the communiqué acknowledges, countries can also improve their debt-to-GDP ratios by boosting growth. So what combination of borrowing discipline and pro-growth reforms might be appropriate? The communiqué is not specific.

To be fair, economic multilateralism has achieved some successes recently. The fear of being isolated at the G20 undoubtedly encouraged China to shift toward a more flexible exchange rate a week ahead of the meeting. On the trade front, it is remarkable that the global recession of 2008-2009, which might have been expected to stoke protectionism, has led to no significant assault on the rules of the World Trade Organization. And the latest G20 summit also yielded a welcome hint on the prospects for the languishing U.S.-South Korea free-trade agreement. The Obama administration said it would renew efforts to get the deal through Congress after the November midterm elections. The next G20 summit will be hosted by the South Koreans in November, providing the administration with a target date by which to show progress.

Summit communiqués may not affect the world much. But summits still seem to focus leaders' attention usefully.

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