It would be an understatement to say that recent economic news across the globe has been... unsettling. With that in mind, Floyd Norris had a front-page essay in yesterday's New York Times on the failure of global policy coordination:
[T]here seems to be little willingness — or perhaps lit-tle ability — for the major countries to act together again. Squabbles have grown, some countries are in fiscal distress, and others face daunting domestic problems. The European situation is the most pressing. Banks are under pressure in many countries, for a combination of reasons. They did not raise as much capital as they might have when markets were more buoyant last year. In some cases, they appear to have been slow to recognize their real estate loan losses.
But the most important factor may be that national governments are weak — in every way possible.
This prompted FP head honcho David Rothkopf to tweet, "Current global economic leadership void likely to be seen by history as worst since that preceding Great Depression."
To which I have to say... bulls**t.
Bemoaning the lack of "global leadership" is the international relations equivalent of bemoaning the failure of a national leaders to possess the political will to Do The Right Thing or make the Really Big Speech that will change everything. Most of the time, "global leadership" doesn't change a thing.
For an example, in a follow-up tweet, Rothkopf provides a useful list of what ails the current global economy:
Euromess, rest of developed world spluttering, faltering EMs, bldg risk in global financial system, currency, trade issues
An excellent list -- and yet it's not at all clear whether global leadership would solve any of these problems. The Euromess a Europroblem. Weakening growth in the developed and developing world is a problem, but largely a function of domestic policies rather than global ones. The "currency war" meme has largely played out -- don't tell anyone, but the RMB is appreciating quite nicely right now. As for trade, Doha might be dead, but trade growth is still outstripping output growth. Protectionist actions have not matched protectionist sentiment -- indeed, the past few years might be definitive falsification of the "bicycle theory" of trade.
In fact, in some instances, global leadership might have exacerbated these problems. For example, one of the areas where there has been leadership is in the creation of the new Basel III core banking standards. And, hey, guess what's contributing to a drying up of cross-border credit?
Lending to banks in the eurozone fell $364bn or 5.9pc, with drastic reductions of 9.8pc in Italy and 8.7pc in Spain.
The BIS's quarterly report said the decline in lending was "largely driven by banks headquatered in the euro area facing pressures to reduce their leverage".
Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench.
So what, exactly, is "global leadership" supposed to do at this point? As I read it, those who complain about poor leadership want one of two things. First, they would like national leaders to excercise their "political will," defy domestic constraints, and push for greater economic growth. Fine, but remember -- asking politicians to exercise political will means asking them not to behave like politicians. As a rule, politicians don't do this.
Second, I think there is a desire for one leader to knock some global skulls together and get Germany to start consuming more and the ECB to print more money and China to stop saving and any other action that would jumpstart the global economy. Again, fine, but in the history of the global economy there has only been one instance in which one country had sufficient economic power to exercise this kind of leadership -- the United States of the late 1940s. Truman's leadership was important -- but the U.S. being responsible for close to half of the world's economic output was even more important. Even if Barack Obama had an iron grip over all of America's policy levers, he couldn't do what Truman did with the Marshall Plan and the Dodge Line. Leadership without power is simply someone ranting on a street corner.
Look, I don't like defending Angela Merkel or Barack Obama or the Standing Committee of the CCP Politburo. I do agree with my fellow wonks that they've made some mistakes. All I'm saying is that the notion that some kind of global policy coordination will lift the global economy out of its doldrums is a chimera. The biggest problems with the global economy are almost exclusively domestic in origin at this point. The big global steps, such as boosting IMF reserves, have already been taken. Greater trade liberalization might help a little, but it's not a panacea. Greater capital account liberalization might make things worse. Stronger global regulation might be the prudent long-term policy but it's causing havoc right now. Convincing Germany that a higher inflation rate might be a good idea would be wonderful, but anyone who suceeds at that would be pushing against 90 years of economic history.
So please, I beg my fellow wonks -- when you ask for more "global leadership," be specific -- what exactly do you want to see happen? Cause I don't think there's much at the global level that would really help right now.
Am I missing anything?