When G-20 leaders convene in London on April 2, they will confront the most parlous global economic situation in seven decades. People and markets everywhere will be looking for tangible signals that the world's leaders are up the challenge of crafting an effective global response. The expectations, risks, and stakes are enormous. If the summit fails to restore confidence, we may see a replay of the 1933 London conference that prolonged and deepened the Great Depression. To restore faith in the future, the G-20 must target the immediate threat and formulate a realistic plan of action.
The credibility of this plan will depend on whether it distinguishes the urgent from the merely important. The conferees, like physicians, will need to engage in skillful triage, directing the lion's share of attention and resources to the most acute symptoms, while prescribing a longer-term course of treatment for chronic problems. This weekend's gathering of G-20 finance ministers ahead of the summit provides an opportunity for the world's major economies to specifically acknowledge this need. Unfortunately, there is little indication that G-20 governments are making such distinctions. Prime Minister Gordon Brown of Britain, which will host the summit, views the event as an opportunity to launch a "global New Deal" to transform the architecture of international economic governance.
The risk is that participants will so overload the summit agenda that they will get bogged down in long-term issues and fail to respond to the immediate threat. No doubt, the crisis has revealed structural flaws in the rules and institutions governing the world economy. But before we redesign the firehouse, we need to extinguish the fire. Success in London will require credible commitments to restore the global economy and to stabilize world financial markets. The G-20's three priorities should be to:
- Stimulate aggregate demand. Above all, G-20 governments must take additional dramatic steps to stimulate aggregate demand through coordinated fiscal and monetary policy. To date, the "global stimulus package" has fallen short of the scale of the challenge. The United States and China have launched massive spending programs, but Germany, France, and Japan are shirking their obligations and free riding on others. The International Monetary Fund (IMF) could play a catalytic role here, by publicizing relative burden sharing among G-20 members.
- Get credit flowing. G-20 leaders must also announce a coordinated approach to recapitalizing the global financial system that addresses the overhang of toxic assets that has prevented banks from making additional loans. This need not--and given different circumstances, should not--imply an identical mix of policies across countries. But the G-20 needs to bolster confidence that credit will once again flow and reach agreement on general guidelines for how to address the insolvency of national banking sectors.