President Obama, hosting his first Group of 20 summit, managed to achieve most but not all of his top objectives, including getting member nations to agree to review one another’s economic policies to ensure they do not provoke a repeat of the worst financial crisis since the Great Depression.
“Because our global economy is now fundamentally interconnected, we need to act together to make sure the recovery creates new jobs and industries while preventing the kind of imbalances and abuses that led us into this crisis,’’ Obama said at a news conference at the close of the two-day meeting.
The summit was the third gathering of G-20 leaders since the collapse of Lehman Brothers last year triggered a global economic free fall. Since then, early signs of recovery have emerged around the world, and in the weeks leading up to the summit, the G-20 leaders faced questions about whether it was time to tighten interest rates and withdraw hundreds of billions of dollars in stimulus spending. They arrived in Pittsburgh already in agreement that the global economy was still too fragile to warrant a pullback.
“A sense of normalcy should not lead to complacency,’’ the leaders said in a joint statement. “The process of recovery and repair remains incomplete.’’
The global economy has become stable enough, however, for the leaders to turn their attention to preventing future financial crises. The United States and European nations were able to settle differences over how best to stem irresponsible risk-taking by financial companies. The United States had emphasized the need to raise the quality and quantity of capital that banks must hold to cover potential losses. The Europeans had stressed restrictions on bankers’ pay, including hard limits. In the end, the leaders agreed to those principles - but without the hard limits - as well as better aligning executive compensation with long-term performance and more transparency for trading in complex securities known as derivatives.
Obama was also able to get Europe and China to commit to avoid pursuing economic policies that fuel the huge global imbalances blamed by economists for helping spark the current crisis. Under the agreement, countries with large deficits such as the United States would promise to borrow less while major exporters such as China and Germany would pledge to stimulate domestic consumption. The members agreed to use the International Monetary Fund to help review their economic policies to make sure they do not generate harmful imbalances.
While other G-20 members signed off on the US proposal, many remained skeptical of its effectiveness and its purpose.
What made it easier to sign on is that countries that fail to adhere to the agreement face no penalties.
Critics noted that similar arrangements have been tried before, with little impact on national decisions.
But Edwin Truman, a fellow with the Peterson Institute for International Economics and a former Treasury official, said this latest attempt at rebalancing global growth is promising because it puts leaders on the record and potentially raises the political stakes for them if they fail to comply.
The G-20 also agreed to make itself the principal forum for global economic issues, eclipsing the older, West-dominated Group of Eight and further institutionalizing the new economic order. The Obama administration sees increasing the clout of emerging economies in international institutions as essential to getting developing nations to play a bigger role on other issues such as climate change.
To better reflect the growing role of China, Brazil, and other emerging nations, the G-20 leaders also approved a change of the governance structure of the IMF and World Bank. Summit participants agreed to increase developing nations’ quota of representation shares by 5 percent at the IMF and 3 percent at the World Bank.
Changing the structure of those institutions is key to helping prevent future crises, said Simon Johnson, a former IMF chief economist and Peterson Institute fellow. Countries such as China, South Korea, and Japan began building huge reserves after the Asian financial crisis in the 1990s and their bad experiences with the IMF.
“They have to believe in the IMF so they don’t build huge reserves,’’ Johnson said.
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