Blog Post

A Comprehensive Plan for the Shadow Banking System

When the G20 meets in Toronto on June 23rd and 24th, it will say some predictable things. It will affirm the importance of fiscal consolidation. It will underscore its commitment to strengthening financial regulation. It will reiterate the importance of avoiding protectionism and narrowing global imbalances. Here is a plea that it also say some […]

By: Date: June 14, 2011 Topic: Global Economics & Governance

When the G20 meets in Toronto on June 23rd and 24th, it will say some predictable things. It will affirm the importance of fiscal consolidation. It will underscore its commitment to strengthening financial regulation. It will reiterate the importance of avoiding protectionism and narrowing global imbalances.

Here is a plea that it also say some surprising things. First, G20 members should explain that they are committed to pursuing fiscal consolidation in ways that avoid damaging growth potential. This means limiting cuts to public investment. It means not gutting education, public support for R&D, and infrastructure spending,. Governments with serious budgetary problems have repeatedly warned that no category of spending is exempt from cuts. Well, some categories should be protected precisely to avoid damaging long‐term growth potential.
Having explained how they will support the continued expansion of aggregate supply, G20 leaders should next describe the support they will provide to aggregate demand. This means taking a differentiated approach to fiscal consolidation. Those who absolutely must should proceed with consolidation now, while the others, starting with the U.S., Germany, China and Japan, should commit to consolidating later. Someone has to provide demand for the products being churned out by the world economy. The U.S., Germany, China and Japan can do so because they possess fiscal space and account for half of global demand.

To reassure investors, these countries will of course have to make credible commitments to medium‐term fiscal consolidation. So how can G20 members show that they mean it? A start would be to commit to laying out an explicit medium‐term fiscal strategy using a standard template. It has already been agreed that the IMF will help the G20 with its so‐called “peer review process.” G20 members can delegate to the Fund the task of providing the assumptions about productivity, investment and labor force growth that governments feed into their spreadsheets when they show us how they plan to narrow their deficits. This will prevent them from offering up unrealistically rosy scenarios. The Fund can then collate the submissions and tell us whether the individual national plans add up to a coherent scenario for the world economy. And if national plans are unrealistic or mutually inconsistent, it can send governments back to the drawing board. If the G20 really seeks credibility, it can use Toronto to describe exactly how this process will work.

Toronto would also be a fine time for some leadership from the G20 on the uncertainties that are roiling financial markets. Spain and Germany, we are told, have finally agreed to release the details of their bank stress tests. While this is a positive step, it is not enough. What about other countries, France and Austria for example, where there is similar anxiety about the condition of the banking system? Why not have G20 members all commit to releasing this information on a regular cycle, since there is no knowing where anxiety about the condition of banking systems will pop up next, and since we know that uncertainties about one country’s banks can infect the entire system?

Finally, the governments assembled in Toronto need to explain what they will do to maintain political support for a difficult process of fiscal consolidation and structural reform. If the public turns against it, politicians will too, or else those politicians will be replaced. And if this leads governments to backtrack on their commitments, the next crisis will be worse. The result could then be a lost decade of no growth and high unemployment.

A lost decade would be a breeding ground for populism. This has happened before, notably in the 1930s. But it is not something that happened everywhere. In my own country, the Father Coughlins and Huey Longs never carried the political day. Credit for the fact is owed to a set of targeted federal programs: the Works Progress Administration to provide low‐wage employment, and the extension of basic social support through
the provision of unemployment insurance and social security. These measures helped those least able to help themselves and provided the public with reassurance in a period of high uncertainty. They prevented extremists on both the left and right from carrying the day.
The equivalent today would be tax incentives for hiring young workers, youth unemployment in many G20 countries having reached frightening proportions. It would be programs enhancing access to quality health care, not least for the unemployed, something that is a source of considerable anxiety not just in the U.S. but also in Europe.

It is hard to argue for new social programs, even modest, targeted programs, in a period of enforced fiscal austerity. But governments have to show that they care about those who are bearing the brunt. Otherwise the political center will not hold. The G20, in its communiqué, should signal that it understands.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event

Past Event

Past Event

A conversation with Jin Liqun, president of AIIB

We were pleased to host Jin Liqun, the president of Asian Infrastructure Investment Bank at Bruegel.

Speakers: Sven Biscop, Guntram B. Wolff and Jin Liqun Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 22, 2018
Read article More on this topic More by this author

Blog Post

The financial side of the productivity slowdown

Scholars have devoted much research to the “productivity puzzle” that has emerged after the crisis, and some are investigating the role of financial frictions and capital allocation in relation to this phenomenon.

By: Silvia Merler Topic: Global Economics & Governance Date: January 22, 2018
Read article More on this topic More by this author

Opinion

It is safer to rely on what we know, rather than speculate on what may happen

"Does the Conventional Wisdom About Productivity Need To Be Reconsidered?" On a recent collection of opinions, Marek Dabrowski was invited to give his views on this question.

By: Marek Dabrowski Topic: Global Economics & Governance Date: January 16, 2018
Read article More on this topic More by this author

Blog Post

A few good (wo)men – on the representation of women in economics

Last week, the American Economics Association Annual Meetings held a session on Gender Issues in Economics and later announced that a new code of professional conduct is in the pipeline. In this blogs review we revise the recent contributions on female representation and perception in economics.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: January 15, 2018
Read article More on this topic More by this author

Blog Post

Abenomics, five years in

Five years have passed since Japan’s Prime Minister Shinzō Abe was elected in 2012 and started “Abenomics”, a macroeconomic package based upon the “three arrows” of monetary easing, fiscal stimulus and structural reforms. After five years, has Abenomics worked? We review recent opinions.

By: Silvia Merler Topic: Global Economics & Governance Date: January 8, 2018
Read article More by this author

Opinion

China Fails to Woo U.S. With Financial Sector Opening

China's recent announcement of reforming its financial market has received little enthusiasm from the U.S. despite its potential benefits. The lack of a clear agenda regarding its economic rival has pushed the Trump administration to minor any significant progress of China's reform, and to maintain focus on strategic issues.

By: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Date: January 5, 2018
Read article

Opinion

Chinese banks’ improved asset quality cannot hide other phantoms

The recent improvement in asset quality cannot mask other growing concerns in China’s banking sector. Beyond liquidity concerns, other structural issues such as low profitability and insufficient generation of organic capital, are emerging.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 20, 2017
Read article More on this topic More by this author

Blog Post

The Republican Tax Plan (2): The debate rumbles on

Reactions to the Republican tax plans continue, concentrating on different aspects of the proposed legislation. We review the latest contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: December 18, 2017
Read article More by this author

Podcast

Podcast

Inclusive Europe: a journey towards integration

How has immigration become an essential part of the EU? What incentives should be made to encourage EU intra-mobility? Why and how should we proceed to foster refugees' inclusion in the EU? Zsolt Darvas and Manu Bhardwaj of Mastercard Center for Inclusive Growth discuss the future of migration within the EU.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 14, 2017
Read article More by this author

Opinion

South Korea needs to watch the BOJ rather than the Fed

Due its actual economic structure, South Korea should be more worried about BOJ's extremely lax stance than about monetary policy normalization by the Fed.

By: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 14, 2017
Read article More by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read article More on this topic More by this author

Blog Post

Moroccan job market issues, and labour trends in the Middle East and North Africa

Morocco is an interesting case of structural labour market disequilibrium despite respectable growth, and illustrates the issues facing the region’s oil-importer countries

By: Uri Dadush Topic: Global Economics & Governance Date: December 7, 2017
Load more posts