The leaders of the Group of 20 leading economies first convened almost three years ago to address the financial crisis. As now, there were deep doubts about the financial fundamentals of a major global economy. As now, authorities were struggling to bring Main Street the financial stability it needed, without going too far beyond what it wanted. As now, the immediate challenge was to contain financial panic and the deeper challenge was to lay a foundation for renewed and inclusive prosperity.
The depression that looked possible then has been avoided but the outlook is hardly satisfactory. What can be learned from the past three years as the G20 gathers in Cannes? The world’s leaders, especially the Europeans, will ignore the following lessons at their peril.
First, programme announcements that are vague and try to purchase stability on the cheap are more likely to exacerbate problems than to resolve them. Examples include the abortive super-SIV plan of former US Treasury secretary Hank Paulson; the first financial crisis resolution plan presented by his successor, Timothy Geithner; and Europe’s successive attempts to resolve the eurozone’s crises. Where policy has succeeded – as with the original Tarp in the US, China’s stimulus measures or Switzerland’s recent effort to stabilise its currency – it has been based on clear actions exceeding the minimum necessary to stabilise the situation. This implies that only specific announcements going far beyond existing proposals will lower European spreads to the point where countries such as Italy and Spain can be seen as solvent.