November 18, 2011
Only rarely since 1975 have summit meetings of the world’s major economic powers seen such long documents approved as was the case in Cannes. The summit conclusions could also be published as a book, but readers would find the content difficult to fathom. That wasn’t how it was meant to be. Such summits are supposed to provide political leadership, enable compromises to be reached between the leading powers and boost the momentum behind the technical work of the specialist committees. Sometimes miracles do happen at such meetings, sometimes the homework does at least get completed, and sometimes both things fail to be achieved. Cannes will probably go down in history as a summit that sought to achieve a growth turnaround – but failed – and where there was no trace of a miracle.
It seems they didn’t want to make things easy for themselves. As described recently (In search of growth), the growth forces can be boosted by taking coordinated action in multilateral fora like the WTO, informal international bodies such as the G20, by wholeheartedly implementing national reforms and by making special contributions to reform at the community level of the EU. Of the conceivable homework for international leaders the main tasks are a conclusion of the Doha Round, the dismantling of protectionist measures and the liberalisation of trade, direct investment and movement of labour at the international level in general. At the global level there is also still no practicable framework for the ecological transformation of national economies; only the EU can provide concrete evidence that it has a serious climate change policy. Durban would provide a good opportunity to do so. At the EU level it is the EU 2020 strategy above all that should be promoted, especially the deepening of the single market.
These must be supplemented by structural reforms at the national level that can enable the impediments to growth to be cleared away: mobilising inactive members of the workforce and integrating the jobless into the labour market, competition-based goods and services markets (e.g. also for public procurement, energy and services in general) and longer-term investment in human capital, that is to say: better average educational standards in the working population as well as modern infrastructure in transport, telecommunications and energy. One should also keep an eye on the damping effects of financial market regulation and control its enforcement accordingly. Furthemore, national budgets must be consolidated in a growth-friendly manner. Remedial work on the long-term fiscal sustainability of social security systems also still needs to be done in many countries, and a number of nations can generate growth opportunities by reforming the funding of their social security schemes.
Contrary to what one might think, the G20 in Cannes went to the market with declarations of intent that mainly concerned national reforms rather than common issues. The international arenas where there is work to be done – on trade, investment and climate policies – saw hardly any advances achieved. Modest progress was made on the currency system and the commodities markets, but they only feed into growth indirectly. On the central topic of the renminbi there were a lot of very carefully worded statements.
By contrast, it was easier to list what had already been planned. The action plan for growth and jobs along with its appendix of “Table reforms” contains a series of principles for demand management and supply-side policy. Italy’s reform intentions will now be permanently monitored by the Commission and the IMF. It is to be expected that the list of reforms to the public-sector budget, the labour market and many other segments still has to be extended considerably in order to return Italy to fiscal sustainability and economic growth, completely leaving aside the immediate stabilisation of access to the capital market.
President Obama in turn made a commitment to consolidate the US budget and implement his growth initiatives. Given the situation in Congress, however, there is probably only a small chance of this being achieved – at least as far as the second objective is concerned – but of course it could represent the turning point for the global economy! In other words, no change in Washington at least until early 2013.
Also, it has now been agreed that countries with current account surpluses should stimulate private demand, which Germany had opposed for a long time. Private consumption and private investment (as a percentage of GDP) are now supposed to rise in Germany. This is likely to be difficult, in 2012 at least. Japan is supposed to open its service markets, boost growth (how, it is unclear) and hit the same target, which could be more feasible thanks to special items. China is to expand social security, boost household incomes and expedite a structural shift towards its domestic economy, i.e. implement its five-year plan.
The decisive factor will be whether the countries seriously go about mobilising their labour supply and removing the pertinent barriers in tax and transfer systems and in labour market institutions. In addition, a number of southern European countries should persevere with privatising public-sector assets. Also, competition and regulatory policy could and should be used to convert the focus of labour productivity from protection to competition. All this will take a very long time and may under no circumstances be put on the back burner.
The crux is not so much that the G20 would not discover what could help, but rather that the growth inhibitors passed by the G20 (budget consolidation, financial market regulation) are weighty, concrete and temporary, whereas the drivers of the agenda are weak, imprecise and of uncertain duration. At the very least there is room for doubt as to whether the packages of measures will ultimately generate some stimulus. The eurozone is already threatened by a major economic downturn soon at least, and a recovery of the growth stimuli is currently not on anyone’s forecast radar.
A deal in the Doha Round, a genuine agreement about the yuan exchange rate, a dramatic success at the climate conference in Durban, US legislation on infrastructure, climate, housing or tax issues: each of these individual decisions would have brought more certainty into the search for growth than this cornucopia of praiseworthy intentions. The G20 evidently still has a long way to go from searching for direction on growth policy to approving resolutions.
Looking back in time may help. Helmut Schmidt, Valéry Giscard d’Estaing and Gerald Ford, followed by Jimmy Carter, completed this task with their counteparts from Italy, Japan, Canada and the United Kingdom between 1975 (Rambouillet) and 1978 (Bonn). Coordinated short- and long-term growth policy, trade liberalisation (conclusion of the Tokyo Round of GATT), reform of the exchange rate system and swap agreements, assistance for Italy via the G10 and symmetrical adjustment obligations to reduce current account imbalances dominated the agenda – that sounds topical, doesn’t it? – and they were resolved before OPEC struck again in 1979. The G20 nations have now spent nearly three years on the job. In the fourth year a comparison will be drawn, but the growth policy achievements to date could have been better, if one may be so bold.
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