The G20's Real Failure

The complaint after the G20 Toronto meeting was that governments are concentrating on their own economies and their domestic politics, and ignoring global welfare. Hence the rush, notably in Europe, to tighten fiscal policy too much and too soon. In my column this week for the FT, I argue that the current mood of premature fiscal tightening is unilaterally as well as collectively dangerous. There is no need to invoke global welfare to argue against it. There should be no great need for international co-operation to get fiscal policy right.

Lack of fiscal co-ordination was not the main disappointment in Toronto. Lack of progress on trade and financial regulation--urgent issues where co-operation, I argue, really is necessary--was the real failure.

Unco-ordinated financial rules are self-defeating because of regulatory arbitrage. In financial reform governments have, or ought to have, the same goal: systemic safety, domestically and internationally. There is no excuse for pursuing financial reform as if other countries did not exist. On trade, the calculus is subtler. Politics pushes for protectionism. Governments know that this approach is pure beggar-my-neighbour, collectively ruinous; some may even understand that the welfare-maximising policy is unilateral free trade. On either view, they need co-operation to make open markets politically feasible.

The G20's performance in both areas, needless to say, has been lamentable. The US looks ready to pass its new financial regulation law - but agreement on the Basel III rules on bank capital, which are more important, has receded. As for the Doha round, what Doha round? The G20 richly deserves its bad press, but not for failing to co-ordinate fiscal policy. That is the least of its sins.

It seems I may have spoken too soon about US financial reform...