CHICAGO – At its most recent meeting in Toronto this spring, the G-20 agreed to disagree. Even though the world economy is desperately in need of rebalancing, their declaration was deliberately vague enough to accommodate any set of domestic policies that countries might choose. Everyone came away thinking that they had won, but the world largely lost.
World trade is highly imbalanced. Households in the United States, having spent too much, are now weighed down by debt. Exporters in Europe and Asia have become excessively dependent on selling to the US and other, now-weakened, economies like Spain and the United Kingdom. Myopic actions on both sides have helped entrench a longer-term pattern of behavior that only makes it harder to move away from today’s unsustainable equilibrium.
As ever, change upsets the cozy status quo and the interests that benefit from it. For example, the real-estate lobby in the US obviously has no desire to see government support for housing diminish, despite the fact that the US probably has far more housing stock than it can afford. Similarly, the export lobby in China has no interest in a strong renminbi, even though it is in China’s long-term interest to let its currency appreciate.
We keep hoping that somehow meetings of heads of state will magically produce the policies that will rebalance world trade. Unfortunately, the macroeconomic changes that countries must make involve actions to which even heads of state are unable to commit.