Well they say that a day is a long-time in politics – that an awful lot can happen within 24 hours. The two days of the G20 summit have seemed like a lifetime. The meeting took place in Cannes from 3 to 4 November, 2011. It was the sixth such meeting of the G20: the 19 largest developed and developing countries plus the European Union.
As chair of the meeting, President Sarkozy of France had planned to address the two key global issues of securing a sustained global recovery and strengthening the global banking system. He also wanted to address other issues, such as climate change, commodity price volatility, social inclusion, corruption and corporate governance. But although these issues are covered in the final communiqué, what took centre-stage for the whole summit was the crisis in Greece and its impact on the eurozone.
The drama began on Monday 31 October. The Greek Prime Minister, George Papandreou, decided to call a referendum on the agreement reached at the eurozone summit in Brussels the previous week. In return for banks being required to take a loss of 50% in converting existing Greek bonds into new ones, Greece would have to continue with its tough austerity measures: measures that have caused the Greek economy to implode.
With worries that (a) the referendum would create several weeks of uncertainty, (b) that the agreement might then be rejected, (c) that the government might fall, stock markets plunged. French and German markets fell by over 5%. The Athens stock market fell by 7 per cent. The yield on Italian bonds passed 6%, amidst fears that if Greece defaulted, so too might Italy. But if the eurozone could survive a Greek default, it might not survive an Italian one. Even though several members of Mr. Papandreou’s Pasok party demanded his resignation, he stuck to his guns that an agreement had to have the consent of the Greek people. That was Tuesday.
The next day, Wednesday, was the start of the two-day G20 conference. What was to have been a meeting addressing wider issues of the global economy, was now having to focus on the Greek crisis. President Sarkozy and Chancellor Merkel made it clear that the next tranche of bailout money to Greece would not be paid until the deal agreed in Brussels was accepted by Greece. They gave the first indications that they might accept Greece’s withdrawal from the eurozone.
On Thursday afternoon, Mr Papandreou signalled that he would back down from the referendum if the opposition New Democracy party would join him in supporting the Brussels deal. He would not resign. But the opposition leader, Antonis Samaras, said that his party would not join with Mr Papandreou and that the Prime Minister should indeed resign. He did not resign, but abandoned the calll for a referendum.
With the Greek crisis dominating the meeting, little concrete agreement was reached. One important outcome, however, was the recognition that the financing of the IMF should be strengthened. As the final communiqué states:
We will ensure the IMF continues to have resources to play its systemic role to the benefit of its whole membership, building on the substantial resources we have already mobilized since London in 2009. We stand ready to ensure additional resources could be mobilised in a timely manner and ask our finance ministers by their next meeting to work on deploying a range of various options including bilateral contributions to the IMF, SDRs, and voluntary contributions to an IMF special structure such as an administered account. We will expeditiously implement in full the 2010 quota and governance reform of the IMF.
But despite this recognition of the key role of the IMF, the agreement was essentially that an agreement would be needed!
Articles
Eurozone crisis: yet another twist to Greek farce keeps leaders on edge of seats The Telegraph (4/11/11)
G20 summit: the main issues at Cannes The Telegraph (3/11/11)
Quick! More sandbags (filled with cash) The Economist, Charlemagne’s notebook (4/11/11)
The burning fuse The Economist, Charlemagne’s notebook (4/11/11)
G20 leaders agree to boost IMF resources BBC News (4/11/11)
G20 summit fails to allay world recession fears Guardian, Patrick Wintour and Larry Elliott (4/11/11)
G20 summit: roll call of doom for a dysfunctional family Guardian, Angelique Chrisafis (3/11/11)
Euro zone finds no new money for debt crisis at G20 The Economic Times of India (4/11/11)
Shares jump after referendum ditched New Zealand Herald (5/11/11)
Bunds rise on EFSF worries, Italy under pressure Reuters (4/11/11)
Eurozone crisis: The possible resolutions BBC News (4/11/11)
The G20 aren’t running to Europe’s rescue BBC News blogs, Stephanie Flanders (4/11/11)
Is the euro about to capsize? BBC News, Laurence Knight (4/11/11)
Final Communiqué
Meeting of Finance Ministers and Central Bank Governors: final communiqué G20–G8 France 2011 (4/11/11)
Questions
- Why might the ‘game’ between the eurozone leaders and George Papandreou be seen as a prisoner’s dilemma game? What are the payoffs?
- Why might increasing the bailout for Greece represent a moral hazard for the eurozone leaders?
- Trace through market reactions between the 31 October and the 4 November and explain the movements.
- How crucial is the IMF in achieving global stability and economic growth?
- Assess the success of the Cannes G20 conference.
The possibility of currency and trade wars and how to avert them were major topics at the G20 meeting in Seoul on 11 and 12 November 2010. Some countries, such as the USA and the UK have been running large current account deficits. Others, such as China, Germany and Japan have been running large current account surpluses. But balance of payments accounts must balance. Thus there have been equal and opposite imbalances on the financial plus capital accounts. Large amounts of finance and capital have flowed from the trade-surplus to the trade-deficit countries. In particular China holds a vast amount of US dollar assets: a debt for the USA.
The trade and finance imbalances are linked to exchange rates. The USA has accused China of keeping its exchange rate artificially low, which boosts Chinese exports and further exacerbates the trade and finance imbalances. The USA is keen to see an appreciation of the Chinese yuan (also known as the renminbi). The Chinese response is that the USA is asking China to take medicine to cure America’s disease.
So was the meeting in Seoul successful in achieving a global response to trade and exchange rate problems? Has it averted currency and trade wars? Or were national interests preventing a concrete agreement? The articles look at the outcomes of the talks.
Articles
G20 pledge to avoid currency war gets lukewarm reception Guardian, Phillip Inman and Patrick Wintour (12/11/10)
G20 fails to agree on trade and currencies Financial Times, Chris Giles, Alan Beattie and Christian Oliver (12/11/10)
Main points of the G20 Seoul summit document Reuters (12/11/10)
Factbox: Outcome of the Seoul G20 summit Reuters (12/11/10)
No deal: Seoul’s G20 summit fails to deliver on currencies, trade imbalances The Australian, Laurence Norman and Ian Talley, Dow Jones Newswires (12/11/10)
G20 to tackle US-China currency concerns BBC News (12/11/10)
The expectations game BBC News blogs: Stephanomics, Stephanie Flanders (12/11/10)
Obama: Imbalances threaten growth BBC News (12/11/10)
Obama leaves G-20 empty-handed on currency spat msnbc (12/11/10)
The ghost at the feast The Economist, Newsbook blog (12/11/10)
Forget summit failures, look at G20 record Financial Times, Christian Oliver, Chris Giles and Alan Beattie (12/11/10)
Obama warns nations not to rely on exports to US BBC News (13/11/12)
G20 summit distracted by ‘currency wars’ Guardian, Mark Weisbrot (12/11/10)
Current account targets are a way back to the future Financial Times podcasts, Martin Wolf (2/11/10) (Click here for transcript)
Ben Bernanke hits back at Fed critics BBC News (19/11/10)
Why should you care about currency wars? BBC News, Stephanie Flanders (9/11/10)
G20 sites
G20 Korea, home page
Korean G20 site
2010 G-20 Seoul summit Wikipedia
Questions
- What are the causes of the large trade imbalances in the world?
- What problems arise from large trade imbalances?
- What is meant by beggar-my-neighbour policies?
- Are moves towards freer trade a zero-sum game? Explain.
- Are moves towards protectionism a zero-sum game? Explain.
- Are attempts to get a realignment of currencies a zero-sum game? Explain.
- How successful has the G20 been over the past two or three years?
- Would it be desirable for governments to pursue current account targets?
Keynes referred to the ‘paradox of thrift’ (see, for example, Box 17.5 on page 492 of Sloman and Wride, Economics, 7th edition). The paradox goes something like this: if individuals save more, they will increase their consumption possibilities in the future. If society saves more, however, this may reduce its future income and consumption. Why should this be so? Well, as people in general save more, they will spend less. Firms will thus produce less. What is more, the lower consumption will discourage firms from investing. Thus, through both the multiplier and the accelerator, GDP will fall.
What we have in the paradox of thrift is an example of the ‘fallacy of composition’ (see Sloman and Wride, Box 3.7 on page 84). What applies at the individual level will not necessarily apply at the aggregate level. The paradox of thrift applied in the Great Depression of the 1930s. People cutting back on consumption drove the world economy further into depression.
Turn the clock forward some 80 years. On 26/27 June 2010, leaders of the G20 countries met in Canada to consider, amongst other things, how to protect the global economic recovery while tackling the large public-sector deficits. These deficits have soared as a result of two things: (a) the recession of 2008/9, which reduced tax revenues and resulted in more people claiming benefits, (b) the expansionary fiscal policies adopted to bring countries out of recession.
But the leaders were divided on how much to cut now. Some, such as the new Coalition government in the UK, want to cut the deficit quickly in order to appease markets and avert a Greek-style crisis and a lack of confidence in the government’s ability to service the debt. Others, such as the Obama Administration in the USA, want to cut more slowly so as not to put the recovery in jeopardy. Nevertheless, cuts were generally agreed, although agreement about the timing was more vague.
So where is the fallacy of composition? If one country cuts, then it is possible that increased demand from other countries could drive recovery. If all countries cut, however, the world may go back into recession. What applies to one country, therefore, may not apply to the world as a whole.
Let’s look at this in a bit more detail and consider the individual elements of aggregate demand. If there are to be cuts in government expenditure, then there has to be a corresponding increase in aggregate demand elsewhere, if growth is to be maintained. This could come from increased consumption. But, with higher taxes and many people saving more (or reducing their borrowing) for fear of being made redundant or, at least, of having a cut in their incomes, there seems to be little sign that consumption will be the driver of growth.
Then there is investment. But, fearing a ‘double-dip recession’, business confidence is plummeting (see) and firms are likely to be increasingly reluctant to invest. Indeed, after the G20 summit, stock markets around the world fell. On 29 June, the FTSE 100 fell by 3.10% and the main German and French stock market indices, the Dax and the Cac 40, fell by 3.33% and 4.01% respectively. This was partly because of worries about re-financing the debts of various European countries, but it was partly because of fears about recovery stalling.
The problem is that cuts in government expenditure and rises in taxes directly affect the private sector. If government capital expenditure is cut, this will directly affect the construction industry. Even if the government makes simple efficiency savings, such as reducing the consumption of paper clips or paper, this will directly affect the private stationery industry. If taxes are raised, consumers are likely to buy less. Under these circumstances, no wonder many industries are reluctant to invest.
This leaves net exports (exports minus imports). Countries generally are hoping for a rise in exports as a way of maintaining aggregate demand. But here we have the fallacy of composition in its starkest form. If one country exports more, then this can boost its aggregate demand. But if all countries in total are to export more, this can only be achieved if there is an equivalent increase in global imports: after all, someone has to buy the exports! And again, with growth faltering, the global demand for imports is likely to fall, or at best slow down.
The following articles consider the compatibility of cuts and growth. Is there a ‘paradox of cuts’ equivalent to the paradox of thrift?
Articles
Osborne’s first Budget? It’s wrong, wrong, wrong! Independent on Sunday, Joseph Stiglitz (27/6/10)
Strategy: Focus switches from exit to growth Financial Times, Chris Giles (25/6/10)
Once again we must ask: ‘Who governs?’ Financial Times, Robert Skidelsky (16/6/10)
Europe’s next top bailout… MoneyWeb, Guy Monson and Subitha Subramaniam (9/6/10)
Hawks hovering over G20 summit Financial Times (25/6/10)
G20 applauds fiscal austerity but allows for national discretion Independent, Andrew Grice and David Usborne (28/6/10)
To stimulate or not to stimulate? That is the question Independent, Stephen King (28/6/10)
Now even the US catches the deficit reduction habit Telegraph, Jeremy Warner (28/6/10)
George Osborne claims G20 success Guardian, Larry Elliott and Patrick Wintour (28/6/10)
G20 accord: you go your way, I’ll go mine Guardian, Larry Elliott (28/6/10)
G20 summit agrees on deficit cuts by 2013 BBC News (28/6/10)
IMF says G20 could do better BBC News blogs: Stephanomics, Stephanie Flanders (27/6/10)
Are G20 summits worth having? What should the G20’s top priority be? (Economics by invitation): see in particular The G20 is heading for a “public sector paradox of thrift”, John Makin The Economist (25/6/10)
Why it is right for central banks to keep printing Financial Times, Martin Wolf (22/6/10)
In graphics: Eurozone in crisis: Recovery Measures BBC News (24/6/10)
A prophet in his own house The Economist (1/7/10)
The long and the short of fiscal policy Financial Times, Clive Crook (4/7/10)
G20 Communiqué
The G20 Toronto Summit Declaration (27/6/10) (see particularly paragraph 10)
Questions
- Consider the arguments that economic growth and cutting deficits are (a) complementary aims (b) contradictory aims.
- Is there necessarily a ‘paradox of cuts’? Explain.
- How is game theory relevant in explaining the outcome of international negotiations, such as those at the G20 summit?
- Would it be wise for further quantitative easing to accompany fiscal tightening?
- What is the best way for governments to avoid a ‘double-dip recession’?