Bank of England Governor Mervyn King argues we need a "grand bargain" to rebalance unsustainable national surpluses and deficits; if we don't we face 1930s-style protectionism:
"Such a 'grand bargain' should be the central objective of the G20's Framework for Strong, Sustainable and Balanced Growth. It would require a shared analysis, seemingly absent at present, of the relative importance of the 'good' and 'bad' aspects of the imbalances. And it should comprise (i) an agreed path for the reduction or increase of net exports relative to domestic demand; (ii) an agreed framework for allowing real exchange rates to support the path for unwinding the imbalances; (iii) a set of rules governing the circumstances in which countries would be able to limit short-term capital flows; (iv) macro-prudential policies to limit the build-up of imbalances and add to the instruments available to pursue financial stability; and (v) structural policies, including fiscal measures, to raise national savings in deficit countries and to lower savings in surplus countries."
The Wall Street Journal comments on the slow progress G-20 is making toward such a bargain. "At a meeting in Paris last month, which King attended, it took three days of negotiations before G-20 finance ministers agreed on a set of indicators for policies that contribute to global imbalances. . . . Advanced economies appear to want to move more quickly than developing nations, chiefly China, which is fighting a rearguard action to defend its managed exchange rate."
Jeremy Warner of The Telegraph challenges King's thesis, observing, "There is something fatuous and even faintly ridiculous about blaming the Chinese – GDP per head less than a fifth that of the US – for Western ills. One of the prime reasons why imbalances are fast reasserting themselves after the hiatus of the financial crisis is that rather than letting the economic adjustment run its course – which would have largely solved the problem – Western policy makers have instead been desperately trying to support domestic demand with loose monetary and fiscal policy."
