Facing a fragile recovery and the threat of a new economic slowdown, the G20 this weekend agreed to prioritize boosting growth and jobs and for now to pay less attention to reducing swollen budget deficits.
At a meeting in Moscow in an exhibition hall just outside the Kremlin walls, the finance chiefs from the top 20 advanced and emerging economies in the world showed an unusual unanimity over the risks and priorities for the economy.
Spooked by the depth of slowdowns over the last years, there was clear agreement that for now governments had to go full out to create jobs, boost demand and increase productivity.
The economic recovery is “fragile and uneven,” the finance ministers and central bank chiefs said in their final statement, while unemployment was deemed “excessively high” in some countries.
“Global economic conditions remain challenging,” admitted IMF managing director Christine Lagarde.
While the United States and Japan show signs of sustainable recoveries, growth in the euro zone remains sluggish and even Asian powerhouse China is now showing a decline in its output growth.
“The debate between growth and austerity seems to have come to an end, as captured in the G20’s strong statement on growth and jobs,” said one senior U.S. treasury official.
The official argued that the G20 had accepted that fiscal positions could only be corrected once growth and demand are put on a sustainable path.
“To place the global economy on a stronger, more sustainable and more balanced growth path, we will intensify our policy actions,” the final statement said, calling for an action plan to be agreed at the Saint Petersburg G20 summit in September which will be the culmination of Russia’s presidency of the group.
Protests yards from venue
Russia’s own growth is slowing sharply and the Kremlin will be hoping for a rapid pick-up in the global economy and demand for its energy exports at a time of increasing social instability in the country.
Russia’s economic growth was a measly 1.6 percent in the first quarter, its weakest figure in the aftermath of the global financial crisis.
The G20 meeting began one day after Russian opposition leader Alexei Navalny was convicted on fraud charges his supporters say were ordered by the Kremlin and sentenced to five years in jail.
Russian markets dived the moment the verdict was announced, with economists warning that the sentencing was yet another blow to Russia's appalling investment climate.
Thousands challenged riot police that night in a unexpectedly large demonstration outside the Kremlin, just meters (yards) from where the G20 meeting was due to be held. The protests were the latest mass action in a key emerging market, after the anti-government rallies in Turkey and Brazil.
The next day a court allowed Navalny to be freed pending his appeal and he returned in triumph to Moscow on Saturday, a confusion that hardly bodes well for investor predictability in the country.
While a source close to the G20 talks said Navalny’s fate was not discussed at the meeting, the verdict cast a shadow over Russian bids to present a sleek modern face for its presidency.
‘Biggest change since the 1920s’
Russian Finance Minister Anton Siluanov, a number-crunching bureaucrat who never strays from his brief, was among top officials expressing concern about U.S. plans to scale down its quantitative easing (QE) program that has sought to breathe new life into the U.S. economy.
Russia and other nations are worried that a sudden about-turn by Washington could impede their own recoveries and create unwelcome headaches for national governments at a critical time.
Federal Reserve chairman Ben Bernanke has said the Fed could begin cutting the QE program, which injects some $85 billion a month into the economy via bond purchases, later this year and end the program by mid-2014.
The G20 ensured there was a reassuring note in their communiqué that any changes to programs like the Fed’s quantitative easing would be “carefully calibrated and reassuringly communicated.”
The U.S. treasury official said there was a recognition among the G20 members that as economies like the U.S. strengthen, the normalization of macroeconomic policy is both to be expected and welcomed.
The squeeze on budgets also encouraged the G20 to “fully” endorse an action plan put forward by the OECD to clamp down in tax avoidance schemes by big multinational companies.
OECD Secretary General Angel Gurria said the changes proposed would result in the “most fundamental changes to tax systems since the 1920s.”