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 More on this topic

Upcoming Event

Jan
22
08:00

Rules-based trading system and EU-Australia

At this event the Australian Minister for Trade, Tourism and Investment, Senator the Hon Simon Birmingham will speak about Australia-EU bilateral trade, the FTA negotiations and the importance of multilateral rules-based trading system

Speakers: Senator the Hon Simon Birmingham, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Elections, institutions and statecraft: A tumultuous year for Modi in India

With the turn of the year, India has firmly entered election mode. Recent regional elections have begun to shift the political landscape, while tensions continue to simmer between the Reserve Bank of India and the Ministry of Finance. How the Modi government sees out this term could set important precedents for the incoming government in May 2019.

By: Suman Bery Topic: Global Economics & Governance Date: January 16, 2019
Read article More by this author

Blog Post

What 2019 could bring: A look inside the crystal ball

Economic performance prospects in Europe, the US and Asia in 2019. We start off by reviewing commentaries and predictions about the euro zone, which many commentators expect to perform below potential as uncertainties continue to dampen a still robust recovery.

By: Michael Baltensperger Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 14, 2019
Read about event More on this topic

Upcoming Event

Feb
8
08:30

The world’s response to China’s Belt and Road Initiative

This event will look at the Chinese Belt and Road Initiative as well as the response from the rest of the world.

Speakers: Alicia García-Herrero, Jean-Francois Di Meglio, Theresa Fallon and Uri Dadush Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Policy Contribution

The Belt and Road turns five

Five years after its launch, Michael Baltensperger and Uri Dadush reflect on China’s Belt and Road Initiative. The plan to revive ancient trade routes has the potential to enhance development prospects across the world and in China, but that potential might not be realised because the BRI’s objectives are too broad and ill-defined, and its execution is too often non-transparent, lacking in due diligence and uncoordinated.

By: Michael Baltensperger and Uri Dadush Topic: Global Economics & Governance Date: January 10, 2019
Read article More on this topic More by this author

Opinion

Lose-lose scenario for Europe from ongoing China-US negotiations

Without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: January 9, 2019
Read article More on this topic More by this author

Blog Post

The microeconomics of Christmas

It’s that time of the year, again. Silvia Merler reviews major contributions to the literature on the controversial topic of the deadweight loss of Christmas.

By: Silvia Merler Topic: Global Economics & Governance Date: December 24, 2018
Read article More by this author

Podcast

Podcast

Director’s cut: Wrapping up 2018

With 2018 drawing to a close, and the dawn of 2019 imminent, Bruegel's scholars reflect on the economic policy developments we can expect in the new year – one that brings with it the additional uncertainty of European elections.

By: The Sound of Economics Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: December 20, 2018
Read article More on this topic More by this author

Opinion

China’s view of the trade war has changed—and so has its strategy

The truce agreed on by China and the United States at the sidelines of the recent G-20 meeting in Buenos Aires doesn’t really change the picture of the U.S.’s ultimate goal of containing China. The reason is straightforward: The U.S. and China have become strategic competitors and will continue to be so for the foreseeable future, which leaves little room for any long-term settlement of disputes.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 19, 2018
Read article More on this topic More by this author

Opinion

Immigration: The doors of perception

Surveys show that people systematically overestimate the share of foreign-born citizens among resident populations. Aligning people's perceptions with reality is vital to the betterment of public debate and proposed policies.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: December 12, 2018
Read article More by this author

Opinion

The UN climate conference in Katowice: A message from the European capital of coal

Following the COP24 climate talks in Poland, Simone Tagliapietra reviews the arguments for and challenges to decarbonisation.

By: Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: December 12, 2018
Read article More by this author

Blog Post

Economic policy challenges in Southern and Eastern Mediterranean

For a long time, southern and eastern Mediterranean countries struggled with serious socio-economic challenges and dysfunctional economic systems and policies. Marek Dabrowski reviews the challenges the region has to face to get out of a low growth trap.

By: Marek Dabrowski Topic: Global Economics & Governance Date: December 11, 2018
Load more posts