Is the G20 Starting to Get Back on Track?

This past weekend’s meeting of the G20 finance ministers and central bank governors in Korea ended with a rejection of calls for more fiscal stimulus. This is a marked change from their meeting held just over a month ago in Washington. It’s a change for the better. Nowhere in this past weekend’s communiqué did the ministers and governors call on each other to stimulate aggregate demand with more expansionary fiscal policy. Instead, they said things like “Those countries with serious fiscal challenge need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.” At the previous meeting they were saying instead that fiscal stimulus in some countries “should be maintained until the recovery is firmly driven by the private sector and becomes more entrenched” and that this would “cushion a decline in demand” in other countries. In fact the word “demand” does not even appear in the recent G20 statement. You do not have to be an insider to know that this was a rejection of U.S. requests. A letter from Treasury Secretary Geithner to his G20 colleagues released just before the meeting was packed with calls for governments to maintain fiscal expansion in order “to reinforce the ongoing recovery in private demand.” The word demand appears 8 times in the Geithner letter and not once in the final G20 statement.

There are a number of reasons for the change. Most obvious is the serious crisis caused by the debt problems in Europe. In addition the new UK Chancellor of the Exchequer George Osborne has brought new focus to deficits. And perhaps some are beginning to wonder whether all those debt increasing stimulus packages have brought more harm than good and that policy should be put back on track as soon as possible, as I have been arguing in this blog or in opeds or interviews such as this Bloomberg TV segment from last Thursday just before the meeting: "Taylor says G20 needs to focus on debt, stimulus."

Of course, we must wait to see if the G20 language change is a precursor of real actions. Watch to see if the G20 leaders have the same response as their finance ministers when they hear from President Obama at their meeting in Toronto next month.