Sunday, April 21, 2013

Balanced statement from the G20

The G20 appears more relaxed about the recent monetary easing in Japan, less concerned about the advent of a currency war and more concerned about the appropriate balance between monetary policy and broader structural reforms.  That makes for a balanced and appropriate statement in my view.
Earlier in the year the G20 had been somewhat concerned about, at that time, the prospect of aggressive monetary easing in Japan and the capacity for such action to stoke the fires of a currency war.  The G20 has since seen reason stating that “Japan’s recent policy actions are intended to stop deflation and support domestic demand”.  When you think about it that’s all they can say if they want to be internally consistent.  How can the G20 have a problem with quantitative easing (QE) in Japan and not have a problem with QE in America or the UK?
Furthermore, the G20 has given the green light to central banks to do what they need to do to support growth and avoid (or recover from) deflation.  “Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks.”  No problem with that comment!
In terms of structural reform the communique states that while some progress has been made (in my view arguable for some countries) major policy priorities remain the same in many countries.  In the euro zone that means further steps towards banking union, further reduction in financial fragmentation and continued strengthening of bank balance sheets.  In the US the need is for a balanced medium-term fiscal consolidation plan with the same required in Japan (although for Japan “balanced” is swapped for “credible”).  The communique also requests, rather too politely, that large surplus countries consider taking further steps to boost domestic sources of growth.
While the G20 acknowledge the risks of unintended negative side-effects from extended periods of monetary easing, they don’t go as far as I would in drawing the link between lack of progress of structural reform and the over-reliance on monetary policy to support growth. Therein lays the critical challenge for G20 members: transferring the global rhetoric to demonstrable progress in implementing structural reform at home.