That G20 coded message decoded
The G20's communiqué today is a masterpiece of avoiding the specifics. I am not sure at what point it became obligatory to conduct economics in the language of Asquith-era diplomacy, but the problem with doing so is this - while things like the balance of power in Europe are necessarily intangible, the solvency of banks can be measured on a spreadsheet.
Let's decipher what they mean:
"In Europe, euro area countries have taken major actions to ensure the sustainability of public finances, and are implementing the decisions taken by euro area Leaders on 21 July 2011. Specifically, the euro area will have implemented by the time of our next meeting the necessary actions to increase the flexibility of the EFSF and to maximise its impact in order to address contagion."
Translation: we have bailed out Ireland, Portugal and Greece (twice) and Italy is being kept alive with short-term loans in return for an austerity package nobody believes will work. The EFSF will be used to save French and German banks, not Greece.
"The US has put forward a significant package to strengthen growth and employment through public investments, tax incentives and targeted job measures, combined with fiscal reforms designed to restore fiscal sustainability over the medium term."
"Put forward" to be stamped on by the GOP majority in the House.
..."We reiterate that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability."
If anybody else feels like doing a Swiss and pegging their currency, feel free, it's in the zeitgeist and nobody can stop you.
... "We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required. We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines."
The troubled EU banks are going to be part nationalised and there will be another round of short-selling bans as the mini-credit crunch to come unfolds.
Now what they did not say. At Pittsburgh you may remember the G20 promised to co-ordinate macro-economic policies, to maintain fiscal stimulus and withdraw it together in an orderly way, and for central banks to remain expansionary for as long as necessary:
"We pledge today to sustain our strong policy response until a durable recovery is secured. We will act to ensure that when growth returns, jobs do too. We will avoid any premature withdrawal of stimulus. At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility." (Pittsburgh leaders' statement)
This is what did not happen. Fiscal expansion turned to fiscal crisis all across southern Europe; the ECB raised interest rates in the face of depression gathering at its periphery. The US legislature used a technical vote to cause a fiscal crisis, removing the country's AAA rating and convincing markets that no further fiscal expansion is possible. Then, far from maintaining a united front, Europe's leaders have bickered and fought over how or whether to save Greece.
The issue, all along the line, is economic orthodoxy. The world's leaders chose to split the difference between the anti-Depression policies of nationalisation, breaking up the banks, running huge fiscal deficits and printing money - with a half hearted version of each of these measures. In Pittsburgh they cleverly issued the famous one line paragraph:
Now you would have to revisit that, adding, "for about 18 months". And now it had better work again for long enough to avoid chaos, otherwise, as Robert Zoellick points out today, we are headed for national, not trans-national, solutions.
My experiences in Greece this week convince me that populations will not long stand for chaos, misery and psychological torture inflicted by news media delivering constant bipolar messages of despair and hope.
Switzerland, Japan and effectively the United States are already carrying out nation-centric currency policies; ditto Brazil - and China is a perennial currency manipulator. Once we're done manipulating currencies the next phase is trade war.
To see whether any of this was predictable, see my LSE lecture in January -