The Toronto test

For a while there,in the first few frenetic months after the global financial crisis hit,it seemed like the G-20 would begin to serve as a genuinely useful and effective coordination council. It was clear that the big stakeholders took it seriously; it represented a hefty proportion of world output and world trade; and it seemed small enough to avoid the unwieldy,wrangling nature of other forums. This last G-20 meeting,though,over the weekend in Toronto,would have proved to be a bit of a test for the theory perhaps a little hopeful that a sustainable,multilateral architecture,in which India is given its due weight,might well emerge from the debris of the crisis.

So,how did the meeting fare? In the medium-term,we should be pleased at some of what the G-20 did not agree on. A generalised bank tax across major economies,for example,completely ignores the difference between countries where the financial sector has grown too large and must release resources to the wider economy,such as the United Kingdom,and places such as India where the sector is far too small and needs to be pushed into further modernisation and growth,not stunted. The bigger difference,of course,was on stimulus financing,the timing of exit,and government fiscal deficits. Some countries,such as the United States and India,believed that in spite of considerable internal strain on their finances too early an exit from a coordinated worldwide stimulus would strain the recovery unduly. Other countries,especially those in Europe,were sufficiently concerned about possible pressure on their currencies and their sovereign debt to want to prioritise exit and the stability of their public finances.

Optimists would view the eventual agreement to stagger exit from fiscal stimulus,with the more stressed treasuries exiting first as signs that the G-20 can exist as a mechanism for compromise. Barack Obama,who as an American president is required by an unwritten law to be optimist-in-chief for the free world,said there have been differentiated responses8230; But we are aiming in the same direction,which is long-term sustainable growth that puts people to work. Pessimists would note that David Cameron,Angela Merkel and their fellow Europeans managed to screw an agreement out of the rest of the world that ensures they would continue to profit from fiscal stimulus elsewhere while they reduced their own governments size. How will we resolve this?

In the end,through working out whether the eventual compromise was worth it. The quality of the recovery will determine the usefulness of the mechanism that claims to deliver it.