Last week Mervyn King, Bank of England governor, and Dominique Strauss Kahn, managing director of the International Monetary Fund spoke about international policy co-ordination. Both speeches are worth reading. Though this is not their intention, both speeches also highlight how difficult it will be to get an agreement on a co-ordinated solution to global imbalances.
Remember, global trade imbalances were an important contributor to the financial and economic crisis because huge amounts of money, which flowed to the US searching for yield, ultimately found its way to borrowers who were wholly unsuitable via lots of dodgy dealing in the financial sector.
In the depth of the crisis, world leaders came together to co-ordinate economic policy to ensure that recession did not become depression. Protectionism was largely avoided; monetary policy moved to unorthodox territory, and fiscal policy moved into super-stimulus mode. As Mr Strauss Kahn said:
“In sum—during the heat of the crisis, the benefits from co-operation were evident, and the costs of cooperation were small.”
But such co-operation diminished as recession became recovery and squabbling has replaced co-ordinated activity at the G20 level. Countries are now engaged in a tortuous discussion of how to measure global imbalances because this distracts them from having to disagree about what to do about them. Read more
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