The German G20 Presidency and International Cooperation in Uncertain Times

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A fiscal stimulus for a troubled economy.

The German presidency of the Group of Twenty (G20) begins on December 1, 2016, in an even more difficult political context than the previous Chinese presidency. Due to the German federal elections scheduled for the second half of 2017, Chancellor Angela Merkel’s government moved forward the Hamburg G20 Summit to July 2017, intensifying the time-constraints on negotiators. Despite the circumstances, the forum should act with more urgency to achieve sustainable and inclusive global economic growth. In what could be a decisive year for the international economy, contributions from other members will be crucial. 

Legacies of the Chinese G20 Presidency

The Chinese G20 Presidency was hampered by disagreements on how to increase global economic growth and security concerns, especially the conflicts in Syria and Ukraine. The UK’s ‘Brexit’ referendum heightened political uncertainty, though Donald Trump’s U.S. presidential election victory was, in his own words, “Brexit times ten.” In such circumstances, the world economy remains precarious. Despite many G20 pledges to raise growth since the global financial crisis (GFC), including its 2014 Brisbane summit agreement to boost collective output by 2 percent above then IMF forecasts for 2018, the World Bank projects only 2.4 percent global growth both for 2015 and 2016. This level is categorized by some economists as a global recession, which is why International Monetary Fund (IMF) Managing Director Christine Lagarde refers to the “new mediocre” in the global economy.

The ‘Hangzhou Consensus’ on sustainable and inclusive growth was one key outcome of the Hangzhou G20 Summit of September 2016. This constituted a more integrated, strategic approach to global economic governance than existed before the GFC. It is intended to create “an innovative, invigorated, interconnected and inclusive world economy”; while the rhetorical shift this year to combining “fiscal, monetary and structural policies” to achieve growth increases the scope for collective action, potentially through trade-offs over these aspects of the agenda. The new ‘consensus’ avoids the universal prescriptivism and free-market emphasis of the earlier Washington Consensus, indicating important modifications in the norms and practices of global governance since the GFC.

Goals and challenges of the German G20 Presidency

Chancellor Merkel has pledged to “continue much of the work launched… during China’s Presidency during our German Presidency”, implying a broad-range approach. She has also stated “economic growth that benefits all” is the most important objective for the G20, though it is hard to square this with German Finance Minister Wolfgang Schäuble’s opposition to any potential coordinated G20 fiscal stimulus. The German G20 Presidency will likely emphasize cooperation on international migration, while focusing on African development issues and trying to advance the 2030 Agenda for Sustainable Development and the Paris climate agreement. The Germans also emphasize the need to improve coordination on global health issues. They will prioritize structural improvements in the global economy, partly through infrastructure investment and the ‘Base Erosion and Profit Shifting’ tax agenda. The German presidency additionally could focus on economic inclusion and inequality, the digital economy, and food security.

Another issue that will be an important focus during the German presidency is the recent slowdown in international trade, an effect of the incomplete recovery from the GFC. The U.S. presidential campaign indicated the increasing influence of protectionist politics, especially when the now president-elect rejected the Trans-Pacific Partnership (TPP) and pledged to renegotiate the North American Free Trade Agreement. The G20 should have addressed distributional effects of trade more comprehensively since the GFC. The failure in the U.S. and other industrialized states to counterbalance adverse effects from global trade and capital flows, on domestic employment and incomes of less-skilled workers, some of the so-called ‘losers’ of international commerce, has contributed to the rise of anti-free trade populism. Notwithstanding the latter, there are legitimate public concerns about the distributional consequences of agreements such as the TPP and the Transatlantic Trade and Investment Partnership (TTIP).

The shifting global political context

The Obama Administration hoped to address recent economic problems through a fiscal-stimulus strategy, involving infrastructure investment, but was constrained by the Republican-controlled Congress. Rather ironically, a similar approach indicated by Trump’s election campaign might have more chances of implementation. This would influence the political balance in the G20, especially if the Trump Administration pushes for a G20 fiscal-stimulus strategy that finds support among several forum members. The Canadian government of Justin Trudeau is starting to implement its new, domestic fiscal-stimulus strategy. Even the UK government has abandoned its former commitment to austerity, in the wake of the ‘Brexit’ referendum. Such changes in the G20, combined with IMF disapproval of growing German trade surpluses, increase the pressure on the German government to accept a more active growth-stimulating approach to their domestic economy.

The decentralizing trend in global economic governance since the start of the twenty-first century might lead to more disjointed regional agendas, if the G20 cannot fulfill its potential as an inter-regional forum for cooperation between developing and industrialized states, international financial institutions (IFIs), and other stakeholders. One benefit of this decentralizing process is that non-transatlantic states and policy actors, especially the Chinese but also others from regions such as Africa, the Asia–Pacific, and Latin America, now have the opportunity to provide leadership, particularly if the United States and European governments are unable to contribute more effectively.

The global-governance contributions from IFIs such as the IMF and World Bank, plus from informal fora such as the BRICS and MIKTA and new regional and multilateral projects, might have a further positive effect by increasing peer-pressure on the Group of Seven states to raise their game. The shifting balance between G20 austerity and fiscal-stimulus camps could have a similar effect, by pressuring the German G20 Presidency to advance a more active growth-stimulus strategy in its agenda. Peer pressure also would intensify the sense of urgency if a new economic crisis developed, just as the context of emergency increased G20 macroeconomic policy cooperation during the GFC. Nobel laureate economist Robert Lucas noted in October 2008 that “everyone is a Keynesian in a foxhole”, implying the tendency of policymakers to turn to fiscal stimulus when national economies are in deep trouble.

G20 action needed on sustainable and inclusive growth

Some scholars believe the G20 has been ineffective recently, but the historical lessons from the 1930s and ’40s indicate the dangers from political inaction during extended periods of global economic weakness. On a more positive note, the postwar Bretton Woods negotiations provided solutions to the even greater economic challenges of that period. The Great Depression and the GFC showed that markets do not consistently and rationally ‘self-correct’. The responsibility of governments and global governance is to improve the well-being of citizens, including by reducing the negative effects of flawed markets.

The Chinese G20 Presidency hosted a serious debate about how to achieve sustainable and inclusive economic growth. The German presidency should build on the Hangzhou agenda, and take seriously the imminent dangers from insufficient policy measures to achieve growth in the short-term, rather than ignore current problems as if a long-term, ‘structural’ adjustment was all that is needed. As John Maynard Keynes famously quipped about this attitude, “In the long run we are all dead.” Ordinary citizens are rejecting mainstream politics because they have already suffered from several years of global economic malaise. Further delays to achieving more sustainable and inclusive growth could have dangerous social, political, and economic consequences for the world.

Image: Jonathan Luckhurst

Jonathan Luckhurst is a Professor at the Center for North American Studies, Dept. of Pacific Studies of the University of Guadalajara.

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