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G-20 wastes time on structural reforms, as leaders ignore trade imbalance, unemployment

Artists perform onstage during a gala of the G-20 summit at the West Lake in Hangzhou.
VCG | Getty Images
Artists perform onstage during a gala of the G-20 summit at the West Lake in Hangzhou.

It seems that the G-20 has become a yet another unnecessary, ineffective and very expensive, taxpayer-funded, talking shop.

China's carefully prepared meeting in Hangzhou will have no binding, or "best-effort," agreement on any specific and urgently needed coordinated stimulus measures to rev up anemic economic growth in Europe and in the United States – 40 percent of the world economy – where some 40 million people are currently without stable employment or are completely out of work.

Unable to agree on such a program, the meeting is recommending structural reforms and labor-saving production technologies that would inevitably create additional short-term job destructions.

These recommendations look like an intentional diversion from the immediate task of stabilizing a dangerously slowing world economy struggling with huge trade imbalances and exogenous shocks of deteriorating global security.

Some European observers will probably see there an eerie reminder of the German diktat to the hard-pressed euro area countries to implement structural reforms and fiscal austerity, while they were sinking into recession, with rising unemployment, heart-wrenching poverty, lengthening soup-kitchen lines and more than half of young people deprived of jobs and meaningful future.

A Sino-German deal?

That reminder would not be as far-fetched as it seems. According to the statement of China's ambassador to Germany on July 29, 2016, Berlin and Beijing "have been communicating with each other intensively in preparation for the Hangzhou summit." As the two largest trade-surplus countries in the world, China and Germany certainly had many things to share in order to avoid pressures to grow faster so that their trade partners can sell them something.

Germany, the next G-20 chair, also had a clear imprint on the EU platform for the Hangzhou meeting. With a fully-employed economy, Germany does not want to discuss policies designed to promote growth and employment. The EU, therefore, was mainly interested to talk about sharing the burden of the refugee crisis, preventing terrorist financing, tackling tax avoidance and controlling climate change.

And, true to form, the EU also floated its "pie in the sky."

Noting "strong synergies between the investment priorities of the EU and the G-20," the Brussels Commission insisted that the "European Investments Plan was firmly on track to deliver the objective of mobilizing at least 315 billion euros in additional investments in the real economy by mid-2018." That "objective of mobilizing" additional funding is a regrettable equivocation at a time when investment borrowing by euro area corporations was running at a dismal 1.3 percent average annual rate in the first seven months of this year.

No wonder the British got tired of this kind of EU leadership. They slammed the door and triggered a panic that more departures could follow, and that the union's loosening structure would continue to unravel.

And here is Germany's response: Having created havoc in the EU with its misguided fiscal austerity and open-ended invitations to all comers from Middle East and North Africa, Berlin is now calling on tiny Slovakia to come up with a plan to hold the union together during the next EU summit in Bratislava on September 16. Some chutzpah, isn't it?

So, don't wonder why the German-dominated EU settled in Hangzhou for structural reforms and technological innovations instead of insisting on a program of urgent and coordinated policy actions to provide jobs and incomes to more than 20 million of its desperate people looking for work.

A U.S. M.I.A in China

But you may wish to ask what was Washington doing in all this. Here are some of the questions it could be addressing, but isn't.

Are we so happy with our sharply declining economic growth from 3.3 percent at the beginning of 2015 to a pathetic 1.2 percent in the second quarter of this year that we don't need a coordinated demand management? Are we ready to settle for an unbalanced world economy that is costing us a whopping annual trade deficit of $800 billion? Do we want to give an entire percentage point from the growth of our domestic demand to our beggar-thy-neighbor trade partners?

It seems that the answer to these questions is "yes." What else are we to conclude from the absence of any urgent and coordinated G-20 action to share the burden of faster growth and a more balanced world economy?

If we continue like this, we shall be running growing deficits, and they will be recycling their dollar trade surpluses by purchasing controlling stakes in our top research and technology companies. And we shall be swallowing whole the idiotic lecture that the only salvation to our economy are structural reforms and technological innovations - implying that we are an archaic, behind the times, economy.

That's what we got for allowing, in the middle of the 2008 financial crisis, technical problems of global economics and finance to be dealt with at another costly, glad-handing photo-op jamboree of presidents and prime ministers.

The world community already has representative, inclusive and relevant expert- and cabinet-level forums run by the IMF, OECD and the Bank for International Settlements (BIS, aka, the central bank of central banks) to deal with operational and regulatory issues of international trade and finance. Summit meetings should have nothing to do with that. The current G-20 meeting, for example, was prepared by the people who usually work together at these three international institutions. They negotiated the issues, wrote and agreed the summit's communiqué well before their bosses arrived at the capital of Zhejiang, a place that Marco Polo – La Serenissima nobleman – called "the world's most magnificent and noble city."

The policy upshot is this: If the G-20 economic officials - along with their IMF, OECD and BIS colleagues - were allowed to do their job, the world would now have a financially sound and coherent program to deal (a) with the cyclical economic slowdown and (b) with structural issues affecting a steady and sustainable long-term growth.

That would have kept the G-20 as the world's premier economic forum, if such was needed, instead of perverting its original purpose with big boys' unending power plays on acute strategic and security issues in East Asia, Middle East, North Africa and Central Europe. That's for the myriad of U.N. and regional institutions, not for the G-20.

Investment thoughts

Another opportunity was missed to set up and execute a program of coordinated policy action to rebalance the world economy, and to support faster growth of demand, output and employment.

Markets will, therefore, treat the G-20 meeting as a nonevent, and will continue to tailor their trading and investment strategies in accordance with perceptions of monetary policies in dollar and euro currency areas. Here is what I think they will see there.

The Fed will maintain its very accommodative policy stance while waiting for the new U.S. legislative and executive authorities to show what they want to do about fiscal and structural problems.

The ECB's current policy will continue because it is connecting with the real economy. Propped up by abundant and cheap credit, the euro area businesses and households seem to be taking with equanimity the chaos of disastrous migrant/refugee policies, Germany's disintegrating coalition, France's volatile election environment, Italy's usual muddling through and Spain's inability to form a stable government.

All this is a vivid proof that the monetary policy works within its surprisingly expandable limits. But that is only because – for now - inflation remains quiescent as a result of the prevailing slack in labor and product markets. Do keep a keen eye on costs and prices.

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