The Failure Of G-20 Meeting And The Trouble Financial Future

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It will be harder to stabilize the global economy based on the principles which came out of the G-20 Toronto meeting than to put a camel through the eye of a needle. The G-2p’s goals and the programs already in place in the member nations are so complex that the chance they will together is nearly impossible.

One G-2o plan was for members to cut in half their national deficits by 2013 and stabilize their national debts by 2016. A look at the current US budget plan shows that reaching those goals may be impossible in America.The G-2o also wants further regulate banks, and, sometimes, to tax them as a way to create funds that would protect taxpayers from costs if large financial firms fail. Part of these programs is to curb the risk banks take as a way to insure that they are less likely to run into liquidity problems in the future.

The G-20 nations include nations with rapidly expanding economies like India and China and crippled ones such as Italy, and to some extent the US. American politicians are reluctant to increase the US deficit and have even voted down programs to expand unemployment benefits. The bias to keep spending low may change if the Democrats hold both houses of Congress in the mid-term election. There are still powerful people in the Administration who believe that more stimulus is the only way to increase employment.

There are still many issues on the global economic stage that have not been addressed and may not be without disrupting relationships among G-20 nations and the liquidity of the financial markets.

The question about the yuan’s revaluation was not the subject of much public debate in Toronto, but most of the country’s trading partners are unsatisfied by China’s effort, or lack of effort, to address its artificially low currency. That means  some level of protectionism may not go away. Resistance to trading with China could sharply slow its expansion and raise the cost of goods for its trading partners.

Austerity in Europe is far from being a reality. Passing legislation does not mean that the programs will be accepted by voters. There will almost certainly be labor unrest in places like Italy and possibly the UK. There is a fear among some economists that the new taxes, mostly VATS, will be regressive and will undercut GDP growth. That could destroy the G-20 goals for deficit and national debt restraint. The global capital markets may still be the only source of funds to underwrite the costs of running nation’s that cannot grow.

The enemies, or at least perceived enemies of a complete recovery of world trade will be China and Germany because they are huge exporters and modest consumers.  As the US recedes from its place as the largest consuming nation in the world, China and Germany fill will be expected to fill that  role, at least in part.

The gathering also failed discuss the issue of contagion. Most institutional traders in sovereign debt and the insurance of the same believe that Greece will default in the next two or three years. Even the $1 trillion facility put in place to cover the capital needs of the region’s weakest nations may be inadequate if the smart money walks out on funding Europe and bets heavily against the financial recovery of the smallest countries in the region.

The most powerful enemy of economic stability is still unemployment, which is at decades-high levels in much of the developed world.  Countries can either watch huge portions of their workforces go without any financial support at all, crippling consumer spending profoundly, or they spend hundreds of billions of dollars to cover the costs of caring for the unemployed. The social safety nets nations such as Spain will be particularly hard to cut. Even the US may turn to putting billions of dollars toward keeping its unemployed housed and off the streets.

The dynamics of the global economy have been so badly eroded in the last three years that solving a large part of them is the next three years may be impossible. But that timetable is at the heart of what the most powerful nations believe is the short-term future of the world’s economy.

Douglas A. McIntyre