Finance minisiters and central bank leaders from the world’s 20 leading economies are meeting this weekend in Shanghai to discuss the current state of the global economy, which looks shaky at best.
With concerns over the U.S. stock market, global growth, and the ability for governments to fight another global recession should one occur, here are three things you need to know about this weekend’s meeting.
We’re in the midst of a currency war, and nobody wants to admit it: For years now, nearly every major economy has engaged in some sort of unconventional monetary policy, be in quantitative easing or negative interest rates, to try to stimulate domestic demand. But the success of this strategy has been middling at best. What’s more, many economists believe that some countries, like Japan, are engaging in these tactics simply to boost exports rather than demand at home.
Whatever the stated intentions of policy makers in countries whose currencies have been falling precipitously against the dollar, there’s reason to believe the effects can be quite dangerous. A series of competitive devaluations can actually end up reducing overall global demand, and create a downward spiral where countries fight for a shrinking pie with successive cuts in the value of their currencies.
The countries who can afford fiscal stimulus are ideologically opposed to it: One way to get out of this trap is to agree to non-monetary solutions to a slowing global economy. Many economists believe that Germany, for instance, needs to significantly ramp up its domestic spending to help cure Europe of trade imbalances, in which a more productive Germany increasingly adds to its trade surplus with a relatively cheap euro and policies that suppress domestic wages, while its trade partners like Spain and Greece languish amid depression conditions. But Germany remains steadfastly opposed to doing its part to unwind these unbalances with fiscal stimulus. “Talking about further stimulus just distracts from the real tasks at hand,” Germany’s Minister of Finance Wolfgang Schaeuble said in an opening statement, according to the Telegraph.
Germany argues that the euro’s woes can be solved with structural reforms alone, a sentiment that is not shared by most economists.
There’s no agreement on what to do to combat the coming global downturn: Meanwhile, world leaders do not even seem to agree on what problems they are there to solve. European leaders, like IMF Chief Christine Lagarde and Bank of England head Mark Carney are sounding the warning signs of a coming global slowdown. “The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium,” said Carney, hinting that the rich world needs to take a serious look at more stimulus measures.
But Germany and even the U.S. sound more optimistic. “Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview with Bloomberg television earlier this week. “This is a moment where you’ve got real economies doing better than markets think in some cases.”