LONDON – Politics trumped sensible economics in the United States this summer, when Congress and President Barack Obama could not agree on taxes, entitlements, deficits, or an investment stimulus. Europe’s leaders were also paralyzed – ruling out defaults and devaluations, as well as deficits and stimulus. And, having run negative real interest rates, printed money, plowed in liquidity, and subsidized commercial banks, central bankers everywhere – most recently US Federal Reserve Chairman Ben Bernanke – appear to have concluded that they, too, have reached the limit of what they can do.
As a result, few people today doubt that the world is drifting, rudderless and leaderless, towards a second downturn. The pre-summer debate about whether we faced a “new normal” of slower growth has been resolved: nothing now looks normal. Muddling through has failed. Unable to conclude a global trade deal, climate-change agreement, growth pact, or changes in the financial regime, the world is likely to descend into a new protectionism of competitive devaluation, currency wars, trade restrictions, and capital controls.
But this is not a time for defeatism. Countries claiming to have reached the limit of what they can do really mean that they have reached the limit of what they can do on their own. The way forward to sustained growth and employment is not through a flurry of one-off national initiatives, but rather through global policy coordination.
That was the goal back in April 2009, when the G-20 set itself three critical tasks. The first, preventing a global depression, was achieved. The other two – a growth pact, underpinned by a reformed global financial system – should now be the main items on the G-20’s agenda when it meets.