Laid Bare in Shanghai: G-20 Tensions Over How to Spur Growth

  • Germany objects to calls for coordinated increase in spending
  • Bank of England's Carney warns of risks from zero-sum game

With G-20 Underway, What Do Leaders Need to Do?

Global finance chiefs split over how best to revive the world economy, risking disappointment for investors seeking a coordinated campaign. 

Differences were laid bare on Friday as central bankers and finance ministers from the Group of 20 developed and emerging markets gathered for talks in Shanghai.

Calls for increased government spending to lift demand, which have emanated from the U.S. and China, ran into opposition from German Finance Minister Wolfgang Schaeuble, who said using debt to fund growth just leads to “zombifying” economies. Bank of England Governor Mark Carney voiced skepticism over negative interest rates, which have now been adopted in continental Europe and Japan, and the head of the International Monetary Fund also warned about diminishing effectiveness of monetary policies.

Wolfgang Schaeuble and delegates at the G20 summit

Photographer: Rolex Dela Pena/AFP/Getty Images

While Japan’s finance minister said the G-20 will reaffirm a pledge to avoid competitive devaluations, the lack of agreement on fiscal or monetary initiatives from the group risks disappointing investors who have urged some coordinated action to address stock declines and weak prospects for growth. Offering some solace was clear signals from China that the host nation will implement fiscal and monetary easing.

Accord ‘Difficult’

“It’s very hard to get uniformity in the absence of a major crisis,” even though there are headwinds to growth, World Bank President Jim Yong Kim said on Bloomberg Television. “I would be surprised if you had universal agreement on coordinated monetary and fiscal policy. It’s just difficult to do at this stage.”

The G-20 officials meet over dinner Friday, with a communique expected at the conclusion of sessions on Saturday. Stocks in Asia rose after Chinese central bank Governor Zhou Xiaochuan said in Shanghai that his country has room for further monetary actions if needed. Finance Minister Lou Jiwei said China also has room to loosen fiscal policy.

“The global economic and financial situation may have become more grim and complex,” Chinese Premier Li Keqiang said in a video message to the G-20 meeting, according to a government transcript. “It is time for countries to stand together to tide over difficulties.”

It’s critical for the G-20 to use all policy levers available, U.S. Treasury Secretary Jacob J. Lew told reporters in Shanghai.

America’s Call

“There’s a shortfall in global demand -- it’s something we think does require focus,” Lew said. “It’s a period when it’s increasingly important to use all the levers of policy that are available. And that means fiscal levers as well as monetary policy and structural reforms.”

There was no such commitment from Germany, which last year posted its largest budget surplus since reunification in 1990 in absolute terms. Schaeuble, in remarks at a conference Friday, said that both fiscal and monetary policies had reached their limits.

“Talking about further stimulus just distracts from the real tasks at hand,” the German finance chief said, seeking instead to focus on structural reforms to strengthen national growth rates. German officials “do not agree on a G-20 fiscal stimulus package,” he said.

European Division

Eurogroup chief Jeroen Dijsselbloem, who heads gatherings of euro area finance ministers, rejected Schaeuble’s assessment, saying hours afterwards that monetary policy can still do more. While the BOE’s Carney also said that it’s a “myth” that central banks are out of monetary-policy ammunition, he warned his central bank counterparts against engaging in a currency war by pushing interest rates too low.

“It is critical that stimulus measures are structured to boost domestic demand, particularly from sectors of the economy with healthy balance sheets,” Carney said in a speech in Shanghai Friday. “There are limits to the extent to which negative rates can achieve this.”

For its part, Japan signaled a desire to avoid confrontation at the gathering, which occurs less than a month after the Bank of Japan roiled markets with a surprise move to adopt negative interest rates. BOJ Governor Haruhiko Kuroda, speaking to lawmakers in Tokyo before flying to Shanghai, said there was no pre-set plan for the BOJ to implement further cuts in rates, and -- along with Finance Minister Taro Aso -- highlighted that the G-20 was agreed on avoiding competitive devaluations.

Currency Language

Lew also said that the G-20 should address the “need to avoid competitive devaluation. That’s competing in a beggar-thy-neighbor way to share a pie that’s either frozen or shrinking, and it doesn’t lead anywhere good.”

As for pro-growth measures, “the most likely outcome could be commitment by some governments to prop up faltering private capital spending, especially in commodity and manufacturing exporters,” strategists led by Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London, wrote in a note.

Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said in an interview that “we are advocating the possibility of using fiscal space to go for selective infrastructure projects” that can strengthen growth. “We need bolder initiatives now, because of how sluggish, how mediocre the performance has been.”

New development banks backed by China have been prominent in backing such initiatives.

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