Reply #84: Try this test: G20 A-OK (FT's Lex Column)! [View All]

[Ghost Dog]

The world may be coming together on what needs to be done to pull the global economy out of crisis. There is much common ground, if not quite a consensus, in many areas: financial regulation, and monetary and fiscal policy. Such agreement might not be a sufficient condition for eventual recovery. But it is a first and necessary one.

Take financial regulation. The de Larosière report, the UK’s Turner review and early drafts of the G20 communiqué all suggest much the same. In the future, the financial sector will be safer and duller. Banks will probably be smaller, regulation tougher, and required capital higher. Lower profitability will take care of the bonus issue by itself; the mob will eventually quieten. Whether such recommended changes are “good” or “bad” is a separate question. The important point is that international agreement seems relatively uniform. As a result, no banking system in one country will have an inherent competitive advantage over another. Tick one.

The same is true of monetary policy. All of the world’s major central banks have cut interest rates to zero, or close. Many are now engaged in quantitative easing. This is risky if done alone as it can weaken the currency and give rise to criticism of “beggar-thy-neighbour” devaluations. But if everyone does it, the whole world can gain from the extra monetary boost. Tick two.

Finally, there is fiscal policy. All countries are opening their wallets. Even Germany’s stimulus is only slightly smaller than the US’s, as a percentage of output. Europe’s biggest tightwad is, in fact, France. And as even the International Monetary Fund now believes countries should spend more, and the IMF’s director is a Frenchman, Paris may well come round too. Tick three.

There is still a long haul ahead. There will be setbacks, and the world is headed for a stiff recession, at least. Whatever happens, the required deleveraging will take years. But there are also grounds for hope.

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