Reflections On The G20 Hangzhou Summit

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Yawn, we are approaching another G20 summit. Yawn because these summits have a history of proclaiming self-evident truths that subsequently aren't implemented. Their promises are as quickly forgotten as their stiff photo snapshots with 30 or so 'world leaders'. The 2016 G20 Hangzhou summit, planned to be held on 4-5 September 2016, will be the eleventh G20 meeting. China's slogan for this summit is "Towards an innovative, invigorated, interconnected, and inclusive world economy." Who could object?

What are the macroeconomic stakes? First, to stimulate growth, fiscal expansion in G20 surplus countries is urgently required. Second, G20 structural policy should focus on rolling back the protectionist measures taken since 2008 in the G20. Third, monetary policy is largely exhausted. At the preceding G20 Brisbane summit, G20 leaders set the goal of lifting GDP by at least 2 percent by 2018. Yet, despite unprecedented monetary stimulus much of the G20, GDP growth projected for 2016 remains well below target growth in the Euro area (1.6%) and in Japan (0.3%), according to the IMF (WEO Update, July 2016). Don't blame the host, China: In 2015, China contributed roughly 30 percent to global economic growth - even with its growth slowing to 6.9%, the increment of GDP that it added to the world was around $760 billion.

The policy package required for achieving the Brisbane goal - monetary, fiscal, structural - seems to have relied excessively on the central banks to do a growth job for which they aren't assigned.

  • Monetary policy: The collateral damage of monetary easing has been the danger of competitive devaluations, notably of the Japanese Yen. G20 policymakers have repeatedly pledged to refrain from competitive devaluations and not to target exchange rates for competitive purposes. China hopes to constrain Japan on FX intervention and to limit further downside for the EUR and GBP (CICC, Daily Briefing, 24 August 2016) with the help of the Hangzhou summit. According to Deutsche Bank's August 2016 FX valuation snapshot, the Chinese Yuan ranks with the Swiss Franc as the most overvalued currency on all metrics used (DB effective rates; FEER; PPP). From China's perspective then, there is little room for monetary easing elsewhere but in Beijing. It would be disingenuous to ask Beijing for more appreciation, also from a global growth perspective.

Graph: The Yuan - the most expensive G20 currency

Source: Deutsche Bank Research, FX Valuation Snapshot, 31 August 2016

  • Fiscal policy: In contrast to monetary policy, there is ample room in G20 surplus countries for fiscal expansion. G20 surplus countries beggar their neighbors by crowding in foreign demand via their savings-investment surplus. Within the G20, China, Japan, South Korea, Russia, and the Eurozone ran a balance of payments surplus last year of over $1 trillion, on average 4 percent of their GDP. In the case of Germany, the surplus is currently over 8 percent. The G20 needs to blame Drs. Schäuble and Merkel directly and forcefully to drop their pathological fixation on the "black zero", the balanced fiscal budget with no red ink. Raising public spending and lowering income taxes in the G20 surplus countries are the most direct way to stimulate world demand and growth in times of zero interest rates.
  • Structural policy: Priority action for the G20 should be a standstill and rollback of trade protectionism. While global trade stagnates, FDI into G20 nations has yet to break out of a narrow range witnessed since 2009. According to the latest report by www.globaltradealert.org - a pre-G20 summit briefing on investment and protectionism - the sustained violation of the G20's pledge on protectionism has resulted in nearly 4,000 trade barriers and distortionary incentives. Seven G20 members have implemented more protectionist measures this year compared to their crisis-era annual average: Australia, the US, UK, Saudi Arabia, Italy, France and Germany. The five BRICS countries, by contrast show a better trade policy performance, but only in comparison.

Graph: Ranking G20 Member Protectionism

Source: FDI Recovers? The 20th GTA Report, CEPR Press 2016.

Name and shame specific G20 countries (as outlined here) that are first and foremost responsible for global lackluster growth: this is the noble task that G20 leaders, especially US President Obama, will face this weekend. On Tuesday, 6th September, the world will hold G20 leaders accountable.

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