G20 summit stops short of committing the leaders to a new fiscal boost.

A draft communiqué for the G20 summit stops short of committing the leaders to a new fiscal boost. The US and UK had earlier called for other nations to engage in more Keynesian-style stimulus to restore economic growth. Continental European nations, led by Germany, had resisted this.

The communiqué, published by the Financial Times, merely reiterates that the G20 countries have already engaged in “unprecedented and coordinated” fiscal stimulation and says they are “committed to deliver the scale of sustained effort necessary to restore growth while ensuring long-run fiscal sustainability.”

The 24-point communiqué also promises to “resist protectionism and reform our markets and our institutions for the future.”

Meanwhile, President Barack Obama admitted to the FT in an interview that it would be difficult for him to ask for more money to recapitalise the banking system until Wall Street convinces voters it is not misusing the money. “If voters perceive that it’s a one-way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe, then it is harder to make an argument for further intervention.”


G20 communiqué

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Avoiding Armageddon
By Hugo Dixon


G20: Be thankful for small mercies. The US and the UK aren’t likely to fall out with continental Europe at this week’s G20 summit in London over the fiscal boosts. The draft communiqué promises to do what’s needed to restore growth and ensure long-run fiscal sustainability. But it falls short of calling for any new Keynesian stimulus.

This fudged language is an acceptance of the facts of life. The fiscal stimulation so far, led by the US and China, was probably needed to stop the global economy tumbling into the abyss. But even President Barack Obama doesn’t think he can get Congress to approve another, even more ambitious deficit spending plan, at least not right away.

Gordon Brown, the other neo-Keynesian cheerleader, had a timely reminder last week that states can’t borrow endlessly. The UK prime minister’s aides claimed that the failure of a government bond auction was just a technical glitch. But Brown has learned that investors’ trust in the government’s creditworthiness can no longer be taken for granted.

Obama, Brown and some other leaders might want to try to pump up their economies with another big round of borrow-and-spend. But if the market won’t cooperate, governments would have to have to slam on the brakes, hiking taxes and interest rates in order to stay in business. Such a sudden reversal would create what some people are calling the Armageddon scenario.

One way of avoiding Armageddon is to ensure long-run fiscal sustainability, as the G20 draft puts it. That’s probably the most one can expect from any communiqué. But such platitudes won’t cut much ice with investors. They will want to see credible plans for getting budgets back into balance in the medium term.

Without that, they will fear that governments will go for print-and-spend, a policy that is likely to lead to high inflation. If inflation fears take hold, governments will find it even harder to borrow the mountains of money they need now to finance their deficits.

hugo.dixon@breakingviews.com

http://www.breakingviews.com/2009/03/30/G20.aspx?sg=nytimes#