The beginning of a new era in global economic policy making is being marred by old squabbles over taxes, currencies and regulation.
Finance ministers and central bankers from the Group of 20 nations ended a meeting in St. Andrews, Scotland, over the weekend with a schedule for comparing each other's medium-term economic goals and eventually suggesting changes if domestic policies appear likely to harm the global economy.
Something as seemingly mundane as a work plan actually stands as a significant achievement because countries ranging from the United States to India have now made concrete what had been only an abstract pledge to work together to achieve economic stability. It's arguably the most significant attempt to co-ordinate global economic policy since the Group of Seven industrial nations was formed in the 1970s.
"There's a stronger commitment now to co-ordinating policy than there has been in a very long time," said Glen Hodgson, chief economist at the Ottawa-based Conference Board of Canada and a former official at the Finance Department and the International Monetary Fund. There's a recognition that "you can wait for a painful market correction to imbalances in the economy, or that you can try to do it with policy."
The challenge now is maintaining unity without the threat of financial catastrophe to focus the mind and feed momentum for change. The G20's Framework for Strong, Sustainable and Balanced Growth comes with no obvious penalties for failing to follow through on commitments, meaning success or failure will be determined entirely by moral suasion and political will.
Strains in the group's newly formed bonds were showing over the weekend, as the U.S. and Canada dismissed European suggestions about taxing financial transactions as a means of curbing the excesses that triggered the deepest global recession since the Second World War and of paying for future bailouts of the banking system.
At the same time, finance ministers and central bankers failed to agree on a way to pay for economic changes that are needed to reverse climate change, and the group's final statement made no mention of currencies, even though volatile foreign exchange markets are complicating the recoveries of many of the G20 members, including the European Union, Brazil and Canada.
The spats, failures and omissions strengthen the position of the many skeptics who doubt that even the lessons of the worst financial crisis since the Great Depression will be enough to get U.S. Federal Reserve Board chairman Ben Bernanke to take into account anything but the American economy as he sets interest rates, or coax Chinese President Hu Jintao to loosen controls on his country's currency.
Disparate agendas risk undermining a recovery that the G20 said is "uneven and remains dependent on policy support." A day after a report in Washington showed that the U.S. unemployment rate jumped in October to the highest since 1983, finance ministers and central bankers said on Saturday that joblessness was a "major concern" and that they would keep stimulus measures in place until they see evidence of stronger private demand.
"This is not the time for bullish confidence in the economy," Finance Minister Jim Flaherty told reporters in Scotland.
The International Monetary Fund reiterated that nations must try to co-ordinate how they walk away from the hundreds of billions they have injected into the global economy through spending, emergency loans and rock-bottom interest rates.
Already, there is evidence that the policy choices of some members of the G20 are causing problems for others. The IMF said in a report for the group that investors are using the U.S. dollar to fund a "carry trade' where investors borrow cheaply in America to buy higher-yielding assets elsewhere. That bet, driven by the Fed's decision to keep its benchmark rate near zero, is stoking volatility in foreign exchange markets and risks causing asset price bubbles in emerging markets, where much of the capital is gravitating.
"If literally true, then the G20 process promises something new," said Pierre Siklos, a senior fellow at the Waterloo, Ont.-based Centre for International Governance Innovation. "The problem begins with the exit strategy. Take the Fed. Do any of the [Fed's] minutes or press releases suggest an appreciation that the U.S. exit strategy should also be sensitive to economic developments elsewhere, let alone another country's exit strategy? I don't think so. The U.S. is worried, first and foremost, about itself, and with good reason."
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney will play a significant role in proving the skeptics wrong.
Canada will host the G20 process next year with South Korea, and the next leaders' summit is set for Canada in June. By that meeting, finance ministers and central bank governors said on the weekend that they will have completed a mutual assessment of each other's economic programs and suggest policy adjustments that leaders will be asked to endorse.
The framework for sustainable growth "is something that Canada in co-chairmanship next year intends to put a lot of weight behind to make sure that it gains traction," Mr. Carney said at a joint press conference with Mr. Flaherty, according to transcript provided by the Finance Department.