Move G20 Policy Coordination to the Front Burner
Most of the time, G20 meetings can be safely ignored. Rarely do foreign prerogatives hold any sway over important domestic economic policy choices, so talk is typically the only output. At this juncture of economic policymaking, however, talk is precisely what the global economy needs from policymakers.
The G20 has the ability to calm some of the turmoil in the global economy if it can improve communication about major monetary policy changes. Coming out of their meeting in Moscow this weekend, the G20 finance ministers and central bank governors should do more to assure the public that their independent policies sum to a holistic management of the global economy.
It may seem dangerous these days to request economic leaders to speak at all. US Federal Reserve Bank Chairman Ben Bernanke’s comments on May 22 about possibly ending the US quantitative easing program threw markets into “risk off” mode, causing stress in economies around the world as exchange rates and asset markets fell. His attempt last month at a fuller explanation only fueled the fire, in part because they coincided with an episode of particularly poor communication from the Chinese central bank.
Countries with tightening monetary policy do not represent the whole picture. Japan recently began its own quantitative easing program, which was preceded by further communication missteps, unintentionally conveying the intent to drive down the value of the yen. It took a coordinated G20 defense to convince skeptics that the Japanese policy accords with a healthy global economy.
The European Central Bank’s (ECB) own quantitative easing policy continues, and in contrast, represents one of the most successful communication strategies of major central banks. By promising to do “whatever it takes.” ECB President Mario Draghi has quite effectively held off the euro bears for the past year.
The strong response to central bank comments shows how sensitive the global economy is to signals about economic policy in the G20 economies – monetary policy in particular – than at almost any other time since the London summit in April 2009. At that time, a united, coordinated commitment to a strong policy response turned the tide of the global financial meltdown. It now appears that not just the introduction, but also the removal of rescue measures requires coordinated G20 communication.
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The scope for a more robust G20 communication strategy includes taking a holistic view of global monetary policy. Interlinkages between markets have required the world to think in terms of global liquidity, yet individual central bankers in systemically important countries still base their policy action almost exclusively on the requirements of their domestic economies.
In fact, while recent economic gyrations have spun off developments in the US, the multi-speed recovery has produced a diversity of monetary policy directions. The US and UK may begin tapering their asset purchases before the end of the year, but the eurozone will not. And Japan is only beginning its aggressive two-year campaign. Individual markets may depend on specific currencies, but it is fairly safe to say that global liquidity will not experience a major reversal soon.
And if it is safe to say, why not say it? Faithful global institutions like the IMF and the Bank for International Settlements provide this sort of holistic analysis, but it is up to G20 leaders to demonstrate that they pay attention to it. Indeed, the G20 can go further than simply placing policies in a global context. It can shape its communication strategy to emphasize amplifying or counteracting policies in other G20 economies, whichever serves the purpose of smoothing volatility.
It may seem fanciful to place so much emphasis on the message over the substance - surely the world sees through the fluff. But recall not just the current sensitivity of markets to seemingly innocuous policy news, but the immense effort central banks have put into learning how to communicate with markets in a manner that doesn’t create volatility. Especially in the uncharted times of unwinding quantitative easing, packaging can be critical.
Fortunately, communication is the easiest form of G20 coordination because it does not require the unrealistic assumption that G20 members will actually coordinate their policies. It only requires a different style of communication.
Policymakers all have domestic constituencies that constrain their ability to appear to consider foreign factors. Clearly Bernanke will not comment in depth on foreign economies during testimony to the US Congress. Yet it would be perfectly natural to do so when attending a G20 meeting. Imagine a panel of central bankers explaining how their domestic policies may interact, just as they normally discuss purely domestic repercussions. Such a discussion need not introduce any new targets to confuse central bank watchers - simply having the conversation would ease market anxiety.
The comparative advantage of the G20 comes when it can take advantage of policies that are likely to happen anyway, and package them as a coordinated global approach. The G20 will never be effective at addressing the euro crisis, for instance, no matter how important that may be for the rest of the world. But anxiety about reversals in global liquidity plays right to the strength of the G20. As individual policy makers struggle with their approach to the removal of quantitative easing, the G20 remains as relevant as ever.