The G20 pledged yesterday to put growth before austerity, seeking to revive a global economy that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.
Finance ministers and central bankers signed off on a communique that acknowledged the benefits of expansive policies in the United States and Japan, but highlighted the recession in the euro zone and a slowdown in emerging markets.
“While our policy actions have contributed to contain downside risks, those still remain elevated,” the statement by the Group of 20 nations said. “There has been an increase in financial market volatility and a tightening of conditions.”
Indications that the U.S. Federal Reserve would scale back its monetary stimulus dominated the two-day talks in Moscow, with emerging markets most concerned by a resulting sell-off in stocks and bonds, and a flight to the dollar.
While the U.S. recovery is gaining traction, China’s export motor is sputtering, Japan’s bid to break out of deflation has not reached escape velocity, and demand in the euro zone is too weak to sustain a job-creating recovery.
Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders’ summit hosted by President Vladimir Putin in September.
“We remain mindful of the risks and unintended negative side effects of extended periods of monetary easing,” the statement said. “Future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.”
Washington managed to ensure that the text contained no binding fiscal targets, saying that consolidation should be “calibrated” to economic conditions. Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington’s call to focus on growth.
With youth unemployment rates approaching 60% in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted − reflected in the fact that G20 finance and labor ministers held a joint session on Friday. The crisis in the euro zone periphery has been exacerbated by capital outflows, and the communique pledged to move “decisively” with reforms to create a banking union in Europe that could revive cross-border lending.
“The debate between growth and austerity seems to have come to an end, as captured in the G20’s strong statement on growth and jobs,” a senior U.S. Treasury official said.
The G20 accounts for 90% of the world economy and two-thirds of its population − many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.
The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world. “Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile,” IMF Managing Director Christine Lagarde told reporters, “so more work is needed to improve this situation.”