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Finance Minister Bill Morneau speaking in January 2016. (Cole Burston/Bloomberg/Getty)
This post has been corrected.
Finance Minister Bill Morneau returns to the international stage this weekend. He and Bank of Canada Governor Stephen Poloz will be in Shanghai for the first gathering this year of senior officials from the Group of 20 economic powers. Morneau could shine in the role. He will be able to say that the government he serves intends to be part of the solution to a stronger global economy. That by itself should be enough to garner rave reviews, as most of the others at the gathering having shown they are capable of nothing but dud performances.
There were high hopes for the G20 when President Barack Obama declared at a summit in Pittsburgh in 2009 that the group would thenceforth be the guardian of the global economy, replacing the smaller Group of Seven industrial nations. The larger assembly of rich countries such as Germany and big emerging markets such as China did good work during the financial crisis. It organized a global spending spree that reversed the Great Recession and it put the screws to the world’s too-big-to-fail banks.
But lately, the G20’s momentum has begun to fade. Under former prime minister Stephen Harper’s leadership, the group declared victory over the financial crisis too soon, wasting time in 2010 negotiating a pledge to narrow deficits and reduce debt that has since has been abandoned. The G20’s members now say they are committed to enacting policies that will increase their combined gross domestic product by 2.1% by 2018. The policies implemented to so far would boost GDP by only 0.8% by the deadline, according to the International Monetary Fund.
If the G20 wants to show it isn’t washed up, now would be a good time. In a note for finance ministers and central bankers, the IMF said market turbulence and the collapse of commodity prices had worsened the global economy’s already dim prospects. “To support global activity and contain risks, the G20 must act now to implement forcefully the existing G20 growth strategies and plan for coordinated demand support using available fiscal space to boost public investment and complement structural reforms,” the fund said.
The IMF’s managing director, Christine Lagarde, will be in Shanghai. But she will struggle to rouse the assembled finance chiefs to take collective action. The situation in the global economy is bad, but it isn’t terrible. The IMF’s forecast for global economic growth this year is 3.4%, marginally lower than its October prediction of 3.6%. A group as disparate as the G20 apparently needs a crisis to make common cause. Otherwise, the economic and political realities of countries such as Brazil, the United States and Indonesia are just too different to inspire the kind of response Lagarde seeks. “Don’t expect a crisis response in a non-crisis environment,” Jacob Lew, the U.S. treasury secretary, told Bloomberg News this week.
No wonder China’s main stock market plunged today. There is no cavalry coming. In recent days, there had been talk of of the world’s biggest economies making an accord to quiet the volatility in currency markets. An interesting idea that would find no nourishment in the current geopolitical environment. And such notions forget that many policy makers like the (non)system in place now. Poloz often observes that a stronger U.S. dollar might hurt American exporters, but is good for the rest of the world because it gives other countries a chance to share stronger U.S. demand.
Still, it’s not too much to expect the G20 to get serious about using fiscal policy to strengthen global demand. Morneau this week reiterated his intention to borrow to invest. He did so as he released new budget forecasts that put next year’s deficit — in other words, the starting point for his first financial plan — at $18.4 billion, compared with an estimate of about $3 billion in the fall. Morneau can risk expanding the deficit because the federal government’s debt-to-GDP ratio is a relatively paltry 30%, about half of what it was in the 1990s when Canada faced a fiscal crisis. That’s what the IMF calls “fiscal room.” Other countries have similar space to invest. Hopefully Morneau’s presence will inspire them to use it.
Correction: this post originally said this was Bill Morneau’s “debut” at the G20, but in fact he attended a G20 gathering in Turkey in November. We regret the error.
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