From left, European Union Economic and Financial Affairs Commissioner Pierre Moscovici, European Central Bank President Mario Draghi, Eurogroup President Jeroen Dijsselbloem, at a G20 meeting in Shanghai, China, 2th February 2016. ©Rolex Dela Pena/AP/Press Association Images
Read more: Will China drag down the world economy?
Nobody really expected the G20 meeting of finance ministers and central bankers in Shanghai last weekend to change the way the world works. Yet, given the long list of things that have been draining confidence and optimism from the global economy, it is especially disappointing that we are left wondering whether policymakers are co-ordinated enough to begin finding solutions to them. Some of the things that those at the G20 meet highlighted as major risks could indeed be mitigated if policymakers agreed to concrete action steps. And that goes as much for economic and exchange rate stability as it does for newer geo-political threats, such as migration in the EU.
But the prize for most bizarre addition by the G20 to its list of "things to worry about" goes to Brexit. This isn’t because we shouldn’t worry, but because our Chancellor George Osborne somehow managed to persuade a disparate group of 18 other participant countries (the EU is the 20th) to express in the communique the significance of a risk that his government created in the first place by agreeing to hold a referendum on our membership of the European Union. Be that as it may, the possibility of Brexit certainly is something that now constitutes a threat beyond the rather parochial concerns to which the referendum debate has already fallen victim.
Under the best of circumstances, the risk of Britain leaving the EU may have had awkward or aggravating consequences, depending on your point of view. But the circumstances are dire. Brexit would tear at the integrity of the EU, already weakened due to mass immigration, or more specifically its failure to handle the phenomenon adequately. If other countries followed Britain’s example, and sauve qui peut became the new motif for Europe, we really would be back in an even darker age. It’s that risk that lies behind the G20‘s warning.
And from a UK standpoint, if we left the EU we would find ourselves adrift in the world, which would be rather different to our current situation. After all, it’s not as though the world is buzzing with opportunities, which those who support Brexit assume (some of whom see things through rose-tinted glasses). World growth is anything but robust. World trade is stagnant. Emerging markets are bleeding capital on a scale unseen since the Asia crisis in 1998, and are facing a growth hiatus of long duration. No one is queuing up to give little old Britain economic and trade deals and benefits anything like those which we would lose if we left the EU. This much, the G20 at least recognised.
In their deliberations and communique, they were at least cognisant of weak economic growth in the global economy, and were reminded of the risks before they were met by the Organisation for Economic Co-operation and Development downgrade and the IMF’s broadside of warnings. They were certainly au fait with what market turbulence earlier this year was all about and what it suggested, even though they insisted that it was out of sync with that they thought was actually going on in the global economy. No one was fooled that this was actually an expression of confidence.
To their credit, policymakers did note that monetary policy alone was no longer enough to deal with the problems in the world economy. Mark Carney, Governor of the Bank of England, had earlier criticised countries pursuing Negative Interest Rate Policies, or NIRP, by arguing that where retail customers were protected from the effects, countries were essentially pursuing a covert form of currency depreciation. This was surely pointing the figure at Japan, and by implication perhaps at the European Central Bank, which meets on 10th March. The European Central Bank is widely expected to build on its NIRP, especially now that Eurostat has published data showing that prices in the Eurozone were 0.2% lower in the year to February. If anyone had forgotten, the ECB has an inflation target of close to 2%.
G20 participants could also take credit, at the margin, by insisting that competitive currency depreciation was "verboten." Well, they didn’t say it as strongly as that, but it’s what they meant, for the most part. The wording was always going to be tricky because people really worry about the consequences of Japan’s monetary policy for the Yen, as Carney had suggested, but also the confusion—and sometime chaos—surrounding China’s position regarding the Yuan. Remember last August’s mini-devaluation, and renewed turbulence earlier this year, which has most recently died down. The risk of a major Chinese devaluation, which some hedge funds have made their prediction of the year, is what really sends the shivers down the spines of global economic leaders, and should scare the rest of us. Today's 0.5% cut in banks' reserve requirements should be seen as a move to counter the liquidity drain from the intervention designed to keep the Yuan from falling.
To head devaluation speculation off, China embarked on a charm offensive before the Shanghai meeting. Zhou Xiaochuan, Governor of the People's Bank of China, who had been in communications purdah since last September for unknown reasons, gave an interview in which he sought to assure that the Yuan would be managed appropriately and that there was no cause for a devaluation. This message was reinforce by his deputy Yi Gang, and Lou Jiwei, the Finance Minister. We shall see how long this commitment lasts, which will be closely linked to the ways in which China manages, or mismanages, its economy over the next 2 years. No one at Shanghai wanted to talk about this central issue in public, even though several policymakers, including Janet Yellen (Chair of the US' Federal Reserve), Mark Carney, Mario Draghi (President of the ECB) and George Osborne, have made no secret of their concerns. And China couldn’t have tolerated a formal mention in the communique. The central issue, though, is the extent to which the Chinese authorities are prepared to abandon their passive attention to the toxic combination of debt accumulation, industrial and construction over-capacity, deflation, and bad loans. These issues won’t necessarily erupt any time in the next few months, but at some point over the next 1-2 years, will if unaddressed.
In fact, in the short-term, China is likely to be the only major country that lives up to the communique wording that urges members to use "available fiscal space to boost public investment and structural reforms." The National People’s Congress in March will most likely be the point at which a new fiscal stimulus package will be announced, incorporating tax cuts for companies, quasi-fiscal spending by China’s three policy banks on infrastructure, and expansion or deepening of social security. The central government’s fiscal deficit is expected to rise from around 2.5% of GDP last year to perhaps 3.5-4% of GDP in 2016.
By contrast, the US is politically unwilling or incapable of any kind of meaningful budgetary initiatives this year, Japan is planning the second instalment of a rise in the sales tax, Germany is viscerally opposed to what it calls "debt-financed growth," and George Osborne used a Shanghai interview with the BBC to warn he might have to make further public spending cuts in the Budget. So this dog is simply not going to hunt anywhere, except probably in China. This should at least keep the Chinese economy out of the feared deep-freeze for a while longer. But we can’t look to China to keep doing this. The rest of the G20 is going to have to take its own propaganda more seriously.
