• Cover Story
• Table of
  Contents
• Contents By
  Topic
• Columns
  • Brownstein
  • Cook
  • Crook
  • Rauch
  • Stokes
  • Schneider
  • Taylor Jr.
• Regular
  Features
  • Hotline Extra
  • Inside Washington
  • Insiders Poll
  • K Street Corridor
  • People
  • The Week on the Hill

The London summit of the Group of 20 industrial and emerging economies was a missed opportunity from the start. The previous summit, in Washington in November, took place after the election but before President Obama was sworn in. That timing furnished an easy excuse for failing to get much done. This next gathering was supposed to be different. After a few months of intense preparations, helped by America's new spirit of global engagement, governments would announce not just strong, coordinated action on fiscal and monetary policy but a new "international architecture" for global governance -- a "new Bretton Woods" no less, in the words of British Prime Minister Gordon Brown.

Summit host Brown and the others have spent the past few weeks lowering expectations. This process is long and difficult, they say, and we are closer to the beginning of it than the end. The Financial Times got hold of a draft of the summit communique three days in advance -- these meetings usually conclude, as it were, before they start, because governments prefer not to be taken by surprise when they turn up for their photo opportunity -- and it was a pretty limp effort. The usual declarations in support of cooperation, open markets, and judicious regulation nestled alongside affirmations of previous commitments and paragraphs of self-congratulation for what has already been done. On coordinated fiscal stimulus, no agreement has been found, and none is likely this week, this month, or this year.

It would be wrong to call the event and the activity surrounding it a waste of time. The summit sherpas -- the finance ministry officials who do the preparatory work -- have reached an understanding about the role and resources of the International Monetary Fund. A big increase in the Fund's ability to lend unconditionally to prequalified governments is in the works, and long overdue. In general, in fact, the IMF's hour has come. An institution that you would think was ideally placed to play the lead role in supervising international finance and managing the global crisis was recently drifting without direction and pushing staff into early retirement. If it can be refreshed with extra resources and a new sense of purpose, this will be money well spent.

In the longer term, it matters even more that the governments of some huge and (until recently) fast-growing economies, such as Brazil, China, and India, are being given a bigger voice. Up to now, they have had little say in the IMF's running. The summit confirms that the broad G-20 -- whose members account for 80 percent of global production -- has taken over from the industrial-country G-7 as the top forum for international cooperation. This step, too, was long overdue.

A sentence in the draft communique even suggests that the United States and Europe will release their anachronistic hold on the top jobs at the World Bank and the IMF, respectively. "The heads and senior staff of the international financial institutions should be appointed through open, merit-based selection processes," the draft said. Indeed they should be.

Valuable as entrenching the G-20 and reviving the IMF may be, though, the most urgent need at this summit was to deal with the immediate danger of a worsening global slump. Designing a coordinated fiscal stimulus to expand global demand, keep people at work, and relieve the pressure for competitive devaluation and new trade restrictions -- the means by which governments traditionally try to export their unemployment -- was the prize that mattered most. Why has reaching agreement on this proved so difficult?

The challenge of running so large a group is surely part of the answer. The bigger these bodies become, the harder it is to get anything done. At the Washington summit -- the first of its kind -- the introductory remarks alone apparently took up more than two hours of the one-day meeting. (When I read this, I was actually impressed that the statements had been as brief as they were.) And the G-20 still lacks a permanent secretariat. This needs to change if the group is ever going to work.

Contrary to much U.S. commentary, Europe's reluctance to stimulate is neither feckless nor clueless.

But the bureaucratic inertia that goes with wider representation is not the main problem when it comes to budget policy. The sticking point is that governments just disagree about the correct scale of fiscal action. If all sides want the same thing and yet, for one reason or another, nothing happens, you can talk about a failure of coordination. What we have here is not a failure to communicate but a failure to agree.

The administration believes, and I think rightly, that countries with the fiscal capacity should further expand their budget deficits.

According to the rule of thumb advanced by the IMF, the situation requires a discretionary boost of 2 percent of gross domestic product in 2009. That would leave some Europeans, notably Germany (discretionary stimulus in 2009, 1.5 percent of GDP) and France (0.7 percent), needing to do more. And on balance, so they should, in my view. Contrary to much U.S. commentary, however, Europe's reluctance to stimulate is neither feckless nor clueless.

During recessions, budget deficits in Europe expand much more rapidly than in the United States, even without discretionary action. European countries have bigger tax bases, so they see revenues drop faster when the economy slows; and their safety nets for the unemployed are far more generous, so they see public spending rise more quickly.

Should the recession persist or even worsen, heaven forbid, European fiscal policy will continue to relax under the influence of these automatic stabilizers.

Europe has anxiety about longer-term fiscal trends, too. Thanks to previous episodes of fiscal incontinence, many countries start with higher public-debt burdens than the United States has to carry. The action of demographic shifts, through generous unfunded state pensions and taxpayer-supported universal health care, is even more daunting in much of Europe than it is here. Don't tell the Chinese, but America has the option of currency devaluation and, at the extreme, inflation as a way of getting out from insupportable foreign debt. Most of Europe's economies no longer have national currencies to devalue, and they have created a common central bank that by design is institutionally conservative to the max.

The Obama administration is proposing higher taxes for the rich, and implicitly contemplates significant tax increases for the non-rich as well -- how else to close the huge and otherwise permanent fiscal gap created by the administration's recent budget? Perhaps higher taxes will fly, perhaps not. But taxes in Europe are already high and resistance to big long-term increases quite strong. A well-planned stimulus might in principle be timely, targeted, and temporary, as Lawrence Summers, head of the National Economic Council, put it; in practice, as he has since discovered, that can be hard to arrange.

Don't tell the Chinese, but America has the option of currency devaluation and, at the extreme, inflation as a way of getting out from insupportable foreign debt.

Europe has even more reason than the United States to be nervous about an additional stimulus that may further destabilize its longer-term fiscal outlook.

On top of all this, of course, is national politics -- though one should bear in mind that if this problem is ever fixed, we will repent the anti-democratic result. Imagine that the case was reversed and Europe was pressing a bigger stimulus on the United States, one that the administration, Congress, or the general public thought unwise. Can you imagine Obama telling U.S. voters, "The argument for extra fiscal stimulus is weak and we would rather not do it, but for the sake of international cooperation, and recognizing Europe's new take-charge attitude, we will do as we are asked"? I didn't think so.

Fiscal policy offers no obvious way to reward a government for putting global cooperation ahead of perceived national interests, or to punish one for doing the opposite. America is not going to say, "If you refuse to stimulate, so will we." So there is no real basis on which to strike a bargain. Trade policy is different. Access to markets can be used to reward, and denial of access to punish. Nations can and do say, "If you raise trade barriers, we will too."

Because governments prefer, or say they prefer, open markets, a failure to keep protectionism in check would be a failure of both communication and coordination, rather than a good-faith failure to agree. In other words, if the G-20 can do nothing else, it should at least be able hold the line against nascent protectionism.

Yet the group's record on free trade during the crisis is far from impressive to date. In November, governments solemnly promised to keep markets open. Seventeen of the 20 countries -- all except Japan, Mexico, and Saudi Arabia -- then went ahead with new restrictions of one kind or another.

The G-20 will reaffirm that worthless promise, and call on the World Trade Organization and the IMF to monitor compliance. Well and good, but what governments mostly need to do on trade is mean what they say.