G20 members: Embarking on a great experiment

Often the true significance of a political document lies not in what it says, but what it doesn’t say. That it will be vague and platitudinous is a given: it’s the choice of platitudes that’s the key.

Consider, then, what the G20 might have said after their weekend meeting, but didn’t. Suppose the final communiqué had been drafted by, say, the economist Paul Krugman. “We, the members of the G20,” it would have said, “commit ourselves to significant further injections of fiscal stimulus. We believe that the failure of economies to respond to previous rounds indicates only that we have not been bold enough. If financial markets are in turmoil, it is plainly out of fear that finance ministers will spend and borrow too little, not too much.” And so on, and so forth.

Or suppose Nicolas Sarkozy had been allowed to write the section on banks: “We continue to believe that large financial institutions should be preserved from failure, for fear of the economic dislocation that would otherwise result. To pay for future bank bailouts, we will tax the banks themselves, firmly convinced that this will not be passed on to consumers, workers or shareholders. We will insist that all member states levy such a tax, to prevent banks from shifting activity to the lowest tax jurisdictions.” Et ainsi de suite, et ainsi de suite.

But that is not what the G20 said—in the same way that the G8, in its own communiqué, did not single out Israel for criticism in the matter of the Gaza flotilla, or commit itself to more stringent targets reducing carbon emissions, among other choices it might have made. It’s easy to say the communiqués are waffly, that they leave plenty of wiggle room, that in many places they amount to each country agreeing to do what it had planned on doing anyway. And even where the commitments are less equivocal, it’s an obvious point that these can scarcely be binding: these are, after all, sovereign countries. But these are deviations around a trend line. And, especially in economic matters—now very much the province of the G20—the thrust was unmistakable.

To be sure, the communiqué encourages member states to “follow through on . . . existing stimulus plans.” (Emphasis added.) But by far the greater weight is given to “the importance of sustainable public finances and the need for . . . credible, properly phased and growth-friendly plans to deliver fiscal sustainability.” And while the document is careful to leave room for these to be “differentiated and tailored to national circumstances,” it also, remarkably for such a document, sets out specific targets for the desired “fiscal consolidation”: deficits “at least” halved by 2013, debt-to-GDP ratios on the downward path by 2016.

Similarly, the language on financial sector reform is particularly concerned with the dangers of “moral hazard,” and sends a clear signal that the days of “too big to fail” are over. “We are committed,” it reads, “to design and implement a system where we have the powers and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers ultimately bearing the burden.” And while it was agreed that “the financial sector should make a fair and substantial contribution” toward the cost of stabilizing the system, “we recognized that there are a range of policy approaches to this end. Some countries are pursuing a financial levy. Other countries are pursuing different approaches.” (Emphasis added.)

It can’t escape notice that, on both points, the G20 consensus was squarely in line with the policies of the Harper government—perhaps not surprisingly, given the urgent lobbying that went on before and during the meeting. Indeed, comb through both communiqués, and it’s hard to find a line that Stephen Harper would disagree with. Aside from the bank tax victory, the financial reform package the G20 is preparing—final agreement awaits this fall’s meeting in Seoul, Korea—looks a lot like the Canadian model generally: higher capital standards, lower leverage ratios, more “intensive” regulatory supervision. There’s a renewed commitment to free trade, including a no-exceptions promise, extending a pledge made at their 2008 meeting, to “refrain from raising barriers or imposing new barriers to investment or trade in goods and services, imposing new export restrictions or . . . measures to stimulate exports” that are not consistent with World Trade Organization rules.

The language on global warming, meanwhile, is quite Harper-like in its tepidity. The G20 limits itself to observing that “those of us who have associated with the Copenhagen accord reaffirm our support for it and its implementation and call on others to associate with it,” while the G8 briefly repeats the “goal” of developed countries to reduce their emissions of greenhouse gases by 80 per cent or more by 2050, “compared to 1990 or more recent years.” (Emphasis added.) True, there is also a shout-out to various reports and working groups looking at the possibilities and modalities of phasing out, over time and subject to national circumstances, certain “inefficient fossil fuel subsidies that encourage wasteful consumption.” But that is unlikely to trouble the Prime Minister unduly. Indeed, the old Harper would have welcomed it.

Whether this remarkable convergence on the Canadian agenda is a product of Harper’s leadership around the conference table, the moral standing accorded us owing to our fiscal and financial health, adroit diplomacy, or simply a happy coincidence, it’s again worth considering the alternative. Binding or not, a collective commitment to run bigger deficits for longer, or to impose a bank tax, would have left Harper in a ticklish place, not only with his fellow leaders, but with domestic voters: multilateralists to the last, Canadians don’t like to see their country offside with any international consensus. But as it is, Harper has been given ample cover for any austerity measures he might wish to impose. Meetings like this may not take historic decisions or set hard and fast rules, but they do help shape the climate of opinion.

About the only setback the Canadians could be said to have endured was on the maternal and child health initiative, intended as the centrepiece of the G8 meeting. But even this was a kind of victory. Yes, Harper’s fellow G8 leaders kicked in ridiculously small sums, less than $4 billion in all, for what one would think would be an unassailable priority—literally, putting food in the mouths of babies. But that only left Harper basking in unaccustomed praise from aid groups for his “leadership” in ponying up the other $1.1 billion, more than one-fifth of the total.

The other thing worth noting about this broad economic consensus, besides its pleasingly orthodox tone, is how unlikely it would have been from such a group 30, even 20 years ago. Balanced budgets, free trade, financial reforms with market disciplines at their core? You’d never have got the developed and developing worlds to agree on these in the past. Indeed, reading through the document, with its familiar-sounding declarations that monetary policy should be aimed at “price stability” and pledges to promote growth through supply-side “structural reforms,” the thought occurs that it is not so much the G8 the G20 is supplanting, as the Organization for Economic Co-operation and Development. China, India and the other emerging economies may have taken their place at the rich man’s table, but it is by embracing the policies that made the rich countries rich, and they know it.

That consensus will be put to the test in coming months. Striking the right balance on capital standards—tough enough to assure banks can survive a credit crunch, not so tough as to tip us into one—will be tricky. (Another nod to Canadian leadership: Mark Carney, governor of the Bank of Canada, has been tipped to head the committee of central bankers that will frame the rules.) And so far as the G20 do all tighten their belts at the same time, the conditions are in place for the kind of laboratory-bench experiment that is rare in economics: a chance to resolve the great fiscal-stimulus debate once and for all. Either the world will tip, as a despondent professor Krugman is now predicting, into another depression. Or, you know, it won’t.