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At G-20 Economic Summit, Relief and Rituals

Interviewee: Roger M. Kubarych, Henry Kaufman Adjunct Senior Fellow for International Economics and Finance
Interviewer: Robert McMahon, Editor
September 24, 2009

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With signs indicating the worst of the global economic recession is over, leaders attending the summit of Group of 20 (G-20) leaders in Pittsburgh on September 24-25 aim to focus on longer-term financial reforms. CFR's Roger M. Kubarych says the summit will likely produce the outlines of a strategy to exit from the huge fiscal stimulus policies enacted at the height of the crisis, including gradual reductions in what he called the "unusual aid" to banking systems in some countries. He also sees agreement taking shape on setting guidelines for compensating executives of financial firms. But Kubarych is doubtful of any sweeping agreements focused on repairing global financial imbalances, seen as the root of the global economic problems. "What will be there is a sense of good feeling, a sense of relief that we're past the worst of it," he says. "A sense of self-congratulation that the things we did seemed to work, a lot of patting each other on the back. That's probably enough to hope for."

Many economists are pointing to a slow but steady recovery from the global recession. Do you agree with this?

My own forecast is different. Basically, there's still a lot of debris that's littering the economic landscape that's going prevent a smooth transition from a recession to strong growth to then stable growth, which is probably what the central banks would love to see. But that would be a very difficult accomplishment when there are so many pressures on consumers; there are so many pressures on labor markets in many countries' and there are still massive imbalances in trade positions. So, I call it a saw-tooth pattern, which will be frustrating. Policymakers will take credit for the ups and they'll tell people to be patient on the letdowns, but it won't be anything like the kind of recession we've just been going through globally.

Pointing to the G-20, what kind of stimulus has the G-20 helped bring about that has contributed to this pattern that you're seeing?

The administration [of U.S. President Barack Obama] acted quickly with a lot of new stimulus. However, the implementation of that stimulus has been erratic.

The exit strategy is important because you have enormous government deficits in most countries, not least ours, and so you have to keep the bond markets happy and relaxed about the future, particularly the future of inflation.

A lot of the infrastructure-type spending hasn't happened yet. So much of the U.S. stimulus will take effect next year, which is useful because otherwise next year could be troublesome. The other countries, particularly the European countries, really relied on textbook automatic stabilizers [such as] bigger unemployment benefits [and lower taxes], and basically the lower taxes and the higher stability payments probably did turn out to be enough. So, if anything, the Europeans are a little ahead of the United States in recovering. The United States was criticizing them for not being more proactive. [The Europeans] said that they didn't need to be and they turned out to be right--aided in no small measure by the pickup in Asia, particularly in China, which has been very substantial. They have used activist fiscal and monetary credit measures. In fact, credit has gone up more than GDP [gross domestic product] in China.

And so, they come into Pittsburgh with all sorts of discussions about an exit strategy for stimulus. To what extent is there a consensus on this?

The exit strategy is important because you have enormous government deficits in most countries, not least ours, and so you have to keep the bond markets happy and relaxed about the future, particularly the future of inflation. The development of an exit strategy that can actually be implemented is very important to keep that bond market confidence up, and it is up. U.S. ten-year, government-bond yields are very modest compared to the overall inflation rate and inflation outlook. So that means the U.S. government is financing this towering deficit at relatively affordable interest rates. [All the G-20 countries] want to do that. So there will be an exit strategy developed. It won't be laid out in all [its] details, but it will basically start with monetary policy and a removal, gradually, of some of this unusual aid to banking systems both here and abroad. Later on, there will be some tuning down of the fiscal stimulus. But that will be the last thing that will be done.

Part of the discussion will include bankers' compensation. Is this issue being exaggerated or is this really a thorny issue that could muddy the water in Pittsburgh?

I don't think it's going to muddy the water in Pittsburgh. There is a large measure of agreement on the thorniest issue, which is executive compensation for banks that are receiving public funding. There's been a lot of convergence in the different views. It's helpful to have guidelines on executive compensation. It's helpful for there to be provisions for claw-backs of big bonuses. It's helpful to have risk-adjusted bonus provisions and the pressure should be put on boards of directors who have to authorize these payments to be more vigilant. That's pretty easy for all of them to agree to. What's a little bit more difficult are the specifics. There are many, many ways in which the different tax structures among the various countries lead to directions for executive compensation as well as other wrinkles, which means that they will go along with [an understanding that] each country will do the best it can for their own situation. That's a kind of classic G-20 economic summit type solution.

There's been a lot of discussion about global imbalances and also cynicism about what the G-20 will or can do about it. The United States is said to be introducing a framework that, according to the Wall Street Journal, would require it to sharply cut its budget deficit, China to rely less on exports, and Europe to make structural changes to boost business investment. How do you think this will fly?

The United States has been arguing for that for decades and always will be arguing it. The United States is a chronic deficit country in international trade. We look more like an emerging market country than we do like an advanced industrializing country. We have very small exports relative to our imports in percentage terms. A lot of those imports are essentially the result of global supply chain management by our own companies. So U.S. companies feel global, they act globally, they operate globally and they try to produce products for American businesses and consumers that make them the most money wherever they actually do the assembly. That won't change. Now, how do we get the Chinese to adjust because that bilateral imbalance is of great significance?

We're basically mutually encouraging each other to go in the right direction. But this is a far cry from totally harmonized policy formation, a very far cry.

We would have towering inflation in the absence of these 350-plus billion dollars a year of Chinese exports to the United States and they know it. So, the Chinese officials come to the United States and they basically say, "We know that these imbalances are not sustainable long term. But we're a patient country and you're not. You just have to be more patient. And we're doing a lot (which they are) to generate domestic demand, particularly in the infrastructure investment area, so be patient."

The past two G-20 meetings have made a point of including language warning off against protectionist impulses. Yet some would say these countries have turned right around and have acted along protectionist lines.

We should applaud a sense of shame that they feel required to put in these bland statements that they're going to avoid protectionist measures. If they leave that out, there will be all hell to pay in the foreign exchange markets and in the bond markets as people say, "Well, that's a signal that the doors are open for all kinds of questionable, restrictive action." So you need them to praise the fact that there haven't been very many of these restrictionist actions. You need them to praise all those great negotiators working on the Doha round [of World Trade Organization talks], [and say], "Let's get more multilateral agreements." Those kinds of statements have to be in there. If they're out then it suggests something very serious is going on.

So from this summit, one should expect to see perhaps exit strategies from stimulus plans, some agreement on executive compensation, maybe something on climate change as well. Does that sound right?

What's coming out of this is an agreement to disagree in the best diplomatic style: "We have these issues, we've made progress in identifying what could be done in a multilateral context on these issues, a little progress has been made here, a little setback there, by and large we all escaped from this recession that could have been far worse. We're all delighted the stock markets are up and so on, but we're not in the business, we G-20, of creating harmonized, truly multilateral solutions. What we are doing is creating an environment in which all countries are encouraged to move in a certain direction at their own pace in their own circumstances. And we're basically mutually encouraging each other to go in the right direction." But this is a far cry from totally harmonized policy formation, a very far cry. It would be an exaggeration to say that the countries are closer together than they were two years ago.

This financial meltdown left a terrible taste, a tremendous anti-American feeling in a lot of countries that we caused this, and they were the victims. They look at what's been achieved in terms of regulatory reform in the United States and they see stalemate. They see backsliding. They see nothing close to final legislation. So, I don't think this is a summit that's going to be, "We're now all on the same page." It's a very different mood. Basically, the Europeans have a lot of homegrown problems that weaken them in such forums. The Germans are going to be voting not too far away. The Italians are seeing all kinds of scandals all over their front pages. The Irish are going to be voting on the European constitution reform [which they initially favored]. It's now shaky whether they will vote "yes," which will create a constitutional crisis of some sort. What will be there [in Pittsburgh] is a sense of good feeling, a sense of a relief that we're past the worst of it. A sense of self-congratulation that the things we did seemed to work, a lot of patting each other on the back. That's probably enough to hope for.

So given the events of the last year, do you see United States taking a leadership role in matters of global geoeconomics and finance?

The United States leads by instigating a lot of ideas. It does not lead by doing and then having people following, because it takes forever for the U.S. government to do anything. And the Europeans particularly, more so than the Japanese--and I don't have much insight on how the Chinese read it, but I assume [Chinese officials] read it very, very carefully, they are so smart and so meticulous and watching everything that goes on in all the counterparty countries. They're looking at a president with a healthy election margin with his own party, with stupendous majorities [in Congress] basically unable to deliver legislative results. That is not the sign of a leader.

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