Is anyone in charge? Investors never thought they’d actually miss the G-20

Among the unlikely heroes of the 2008 global financial crisis were the world leaders who scrambled to assemble in Washington that November to respond to the plummeting markets. They discussed fiscal and monetary measures to bolster the economy. They promised financial markets reform and resources to support emerging markets. They even foreswore protectionism and committed to accelerate free trade talks.

A long time ago, in a galaxy far, far away…

What may spook markets most this week is the dawning realization that there is no plan — and no one appears to be in charge. There has been precious little international coordination on how best to contain COVID-19. Last night, President Trump announced a ban on incoming travelers from Europe and potential relief measures for American businesses and workers. But amid the wave of uncoordinated announcements from world governments, what investors hear is “every man for himself.”

Globally, however, there has been no significant conversation about a financial or economic response outside a limp statement from G-7 finance ministers and central bank governors. Still worse, Russia and Saudi Arabia, two of the world’s more recalcitrant governments, seem to be taking advantage of the global shock to advance their narrow oil agendas.

Markets didn’t react immediately to the G-20 meeting that President George W. Bush had hastily convened, but there was a clear sense that policymakers were all pulling in the same direction. At later summits in Pittsburgh and London, more concrete measures included fresh government spending, coordinated efforts to stabilize financial markets, better bank regulation and new money for the International Monetary Fund and the World Bank.

It was an important part of restoring confidence to markets that had literally lost their bearings, and within months, prices began a slow and steady climb back.

Today’s G-20 operates amid a very different set of constraints. Its two largest economies have embarked on an escalating trade war, notwithstanding the recent truce. The European Union just lost its second-largest economy and the future relationship with Britain looks as cloudy as ever. Japan’s feeble growth and inflation rates send chills through everyone else at the table.

And don’t forget the games between Moscow and Riyadh. In a different time, Washington might be expected to mediate, but those days are long past given how far the Russian relationship has deteriorated. Indeed, it seems like President Vladimir Putin may be using the coronavirus shock, at least in part, to damage the U.S. shale oil sector that underpins America’s energy independence.

In many respects, today’s world brings echoes of the financial turmoil before the Great Depression, when shortsightedness and sharp elbows among the world’s largest economies triggered a collapse of the gold-backed monetary system that no one actually intended. Clearly the threat of military conflict seems very different a hundred years later, but the sense of disorder is rising. 

It seems quaint and slightly pointless to call for more “leadership” that might inspire selfless acts of cooperation. Indeed, a charismatic leader might help in these depressing times, but Bush was hardly known for his soaring rhetoric during the financial crisis. Nor, for that matter, was British Prime Minister Gordon Brown, who nevertheless was instrumental in advancing the global response. 

At this stage, a little common sense would go a long way. 

What if the G-20 governments were to convene their health ministers to share containment strategies? China’s ability to isolate key mega-cities can’t be reproduced in Europe or the United States, but there must be some important lessons as shops close in Italy and U.S. colleges and universities cancel classes and empty dormitories. On Wednesday, the NBA’s decision to suspend its season was part of a cascade of uncoordinated responses, rather than an international public health strategy.

Economically, governments have announced a patchwork of fiscal measures to respond to the economic shock from the virus, and the Federal Reserve has been the most prominent central bank to cut rates. Still, wouldn’t it be nice for finance ministers and central bank governors to launch intense consultations to coordinate their response? The seven-page communique from their long-scheduled ministerial on Feb. 24 mentions “risk monitoring, including of the recent outbreak of COVID-19.” 

Commitments to free trade may be a stretch in the U.S. administration’s new negotiating paradigm. Tariffs now have become an acceptable weapon in polite trade talks, but what if the U.S. and China eliminated remaining tariffs, at least temporarily, to cushion the shock from the virus? 

The larger problem may be that the world of 2008 was still basking in the later stages of a post-Cold War glow. Washington still talked about resetting the relationship with Moscow. The West welcomed Chinese efforts to reflate the global economy, even if its exchange rate policy still rankled. That goodwill is now in short supply. 

Perhaps the most awkward obstacle to jump-starting G-20 action quickly may be that its host for this year’s gathering in November is the same Saudi Arabia that has helped tilt world energy markets into turmoil. Tradition holds that the host shapes the agenda and convenes the meetings, but Washington or Tokyo — or anyone — could get the ball rolling. 

It just wouldn’t take much to suggest that someone was in charge.

Christopher Smart is managing director, chief global strategist and head of the Barings Investment Institute. Under President Obama, he spent four years as deputy assistant secretary of the Treasury and two years as special assistant to the president for international economics, trade and investment. Follow him on Twitter @csmart.