Leaders agreed on a far reaching effort to revamp the world economic system*. The agreements, if carried out by national governments, would lead to much tighter regulation over financial institutions, complex financial instruments and bonuses. They could also lead to greater coordination and more external scrutiny over the economic strategies of individual countries, including the United States.
Most economists agree that the imbalances caused by the huge US trade deficit and related surpluses in China, Germany, Japan and oil exporters, contributed to the global financial and economic crisis. In fact, world growth was underpinned by surplus dollars from China and oil exporters recycled back to US consumers by the financial system. But that mechanism collapsed in 2007 as defaults from subprime borrowers surged and the financial system was severely affected with bailouts of banks and insurance companies in many countries.
In order to achieve a more balanced growth, the United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.
Whilst there is agreement on the need for harmonization of economic policies to avoid global imbalances, the leaders pledged not to withdraw stimulus measures until a durable recovery is in place. They agreed to co-ordinate their exit strategies, while also acknowledging that timing will vary from country to country depending on the forcefulness of measures in place. However, there will be no enforcement mechanism along the lines of the European stability and growth pact to limit budget deficits. For the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the IMF.
Nobody can doubt that the Obama administration is taking the reform agenda forward but it will face resistance from European nations which pursue national interests above all. The German government is determined to resist any firm commitment that would reduce its current account surplus and would not cede sovereignty on core economic decisions.
Another set of decisions concerns the governance structures, in particular the rebalancing of the IMF with developing countries at least 5% more of the voting rights by 2011 and the enhanced role of the Financial Stability Board (FSB) for early warning on emerging risks. Taken together the IMF overhaul with the expanded powers of the G-20 mark an important step in global governance.
Too much or too little? Some countries expected to go further, for example in capping trading bonuses , reforming global institutions or imposing sanctions to countries for not respecting their commitments.
What is at stake is the future of capitalism. The big question is whether G-20 would bring radical reforms to ensure a safer and more equal world or just save it from future crises. For the time being, it looks like an embryonic world economic government.