07 July 2009
A strategy for sustainable economic recovery
- the role of the G20
Hotel Adlon Kempinski, Berlin

Berlin is a truly global city.

It symbolises both Germany’s critical role in Europe.

And Germany’s stature as a global economic power.

Germany is the world’s largest exporting nation.

Germany is the world’s fourth-largest economy.

Germany’s economic development since the devastation of the war has been a remarkable national achievement.

It has been accompanied by strong German engagement on the international challenges we face.

Germany is a strong and active participant in the councils of the United Nations.

A driver of European integration.

And a critical global partner in the fight against international terrorism.

Modern Berlin symbolises the modern world we all share – a truly globalised world – a globalised world full of challenges and opportunities.

And to manage these challenges and to maximise these opportunities, we need global policies and governance structures that reflect the realities and the complexities of the modern world.

The global economy is currently in the midst of the fourth great global economic crisis of the last 100 years.

Two of these global crises occurred in the context of world wars.

And two occurred in peacetime – the Great Depression and, three quarters of a century later, the global economic crisis that confronts us all today.

Both peacetime crises had their roots in an asset price boom caused by loose monetary policy, regulatory failures, and excessive leverage.
It is worth comparing some of the metrics arising from both crises to fully comprehend the dimensions of the challenge we face today.

Take for example a comparison of the twelve months since the recent peak of world output in April 2008 with the twelve months following the 1920’s peak in June 1929.

In the twelve months since April 2008, global stock markets have fallen by more than 40 per cent.

In the twelve months of the Great Depression, global stock markets fell by just over 20 per cent.

Global trade fell by 17 per cent in the first twelve months of the current global recession, compared to a 10 per cent fall in the first twelve months of the Great Depression.

Global industrial output fell by around 13 per cent in the first twelve months of the current global recession – almost identical to the fall experienced in the first twelve months of the Great Depression.

On these metrics at least, the current economic crisis has in some critical respects been of a comparable magnitude to the challenge faced three quarters of a century ago.

But there is one difference between now and 1929, and that is the aggressive and coordinated policy response of global governments led by the G20.

Decisive action by the world’s major economies, coordinated by the G20, has prevented this crisis resulting in the prolonged and deep decline in economic activity that the world experienced in the 1930s:

Unlike the experience of the 1930s, where economic policy settings were initially tightened in many countries, G20 members have rapidly implemented unprecedented macroeconomic stimulus to restore global economic growth.

In the first twelve months of the current crisis, many of the world’s central banks reduced official interest rates to less than one per cent. By comparison, in the Great Depression it took 24 months for official interest rates to reach their lowest point.

Fiscal stimulus measures alone by G20 members since the crisis began are expected to amount to $US5 trillion by the end of 2010 – nearly 8 per cent of global GDP. And IMF research indicates that this stimulus has been 50 per cent more effective because it has been coordinated across countries. In the 1930s, governments contracted rather than expanded their economic activity, thereby compounding the collapse in the private economy.

Further, cooperation in the G20 has helped the world resist beggar thy neighbour policies in trade and finance. In Washington G20 leaders committed to a tariff standstill. While the WTO has identified some slippage, overall it reports that the international community is holding to this, thereby saving the world from a repeat of the tit-for-tat protectionism that choked off recovery in the 1930s.

G20 Leaders also agreed on measures to stabilise their financial systems and restore credit flows, taking decisive steps to restore the health of their financial systems by dealing with impaired assets, recapitalising their banks, and ensuring that financial institutions could support the lending required to sustain the economic recovery. Reinforcing this is a globally coordinated series of specific regulatory reforms that will underpin stronger and more integrated systems in the future – also critical to restore global confidence given the carnage wrought by free-market mayhem in financial markets in the lead up to the catastrophic events of 2007/8.

A further outcome from the London Summit was the agreement to support developing countries by strengthening the resources of the International Financial Institutions. Leaders committed to make an additional $US500 billion available to the IMF and to support a $US250 billion allocation of Special Drawing Rights which will boost the foreign exchange reserves of all countries. No comparable global institution existed or was deployed in the 1930s.

These coordinated and substantial policy responses have contributed to the recent rise in global consumer and business confidence.
They have also supported the first tentative signs of global economic recovery.

Financial markets have stabilised, with financial stocks in the Standard & Poor’s 500 Index increasing 35 percent during the second quarter - the index’s biggest quarterly advance since 1989.

The IMF has indicated that it will revise up its forecast for the global recovery, from 1.9 per cent to 2.4 per cent in 2010.

Likewise, just last month, the OECD upgraded its growth forecast for the OECD area, its first upward revision in two years.

These so-called “green shoots” are a welcome respite from the relentless months of bad news that preceded them.

But they are not a reason for complacency.

We are by no means out of the woods yet.

A global crisis of the magnitude of the current global economic crisis presents two great challenges.

First, the immediate challenge has been to put a floor under the downward trajectory of both confidence and real economic activity.
For the last nine months the world has been focussed on this immediate challenge.

So far, this has been successfully prosecuted by national governments and underpinned by the active coordination of the G20.
However, the second great challenge of an economic crisis – potentially even more complex than the efforts to address the fall – is the challenge to build a sustainable path back to recovery.

In the late 1930s, the trajectory of global recovery was long, painful and prone to setbacks.

Global industrial output did not bottom out until 36 months after the crisis began.

And global industrial output did not return to its 1929 levels until nearly nine years later.

The scale of wealth destruction and credit market dislocation retarded the recovery and led to nearly a decade of below trend growth.
Arguably, the recovery period, marked as it was by high unemployment and unstable growth, was more damaging than the initial years of the crisis.

Today, as we gradually move from the first phase of the financial crisis into the second, we must remember that the challenge of recovery could be at least as great as the challenge of the crisis itself at its absolute height at the end of 2008.

Furthermore, the challenge of the recovery is now even more complex than it was in the past due to the exponential globalisation of economic activity, turbocharged by the growth in financial flows, financial assets and the new technologies underpinning the intricate interdependencies of global financial markets.

The rapid globalisation of financial assets has been remarkable.

The value of global financial assets grew from less than 100 per cent of GDP in 1990 to nearly 400 per cent in 2007.

Foreign investors own one in three government bonds around the world, up from just one in nine in 1990.

One in four equities and one in five private debt securities is now held by a foreign investor, triple the level in 1990.

These statistics highlight both the interdependence of the global economy and the absolute necessity that we act cooperatively as we move to address the emerging financial and economic challenges of the future.

There is no alternative.

Uncoordinated national responses are no longer adequate.

Everything literally is now connected to everything else – as graphically reflected in the rapid and synchronised nature of the current global economic downturn arising from the sub-prime crisis in the United States in 2007.

The world still faces at least seven complex economic challenges associated with the recovery.

First, while confidence has improved, downside risks remain and recent indications suggest that more bad news is still to come.

Recent unemployment data indicate that jobs are being lost faster than expected.

In the last week, both the European and US unemployment rates have reached 9.5 per cent, with leaders in both regions indicating that they expect unemployment to rise even further.

These facts make clear that, as the financial sector crisis thaws, the trajectory of the real economy is still uncertain.

That is why, for example, Bob Zoellick, President of the World Bank, warned only yesterday that the uncertainty of the current global recovery
meant that we should be cautious about any premature withdrawal of current fiscal effort.

Second, credit markets continue to be impaired in many countries.

The IMF has again revised up its estimate of total write-downs on financial assets to $4 trillion across the advanced economies – a staggering amount equal to about six per cent of global GDP.

Several countries have not acted as decisively as others to address the toxic assets on the balance sheets of their major banks – creating continued uncertainty in global credit markets.

Overall credit to the private sector in advanced economies is still forecast by the IMF to decline during both 2009 and 2010.

Third, we face the challenges of lifting long-term growth.

After the recession has passed, the global economy may continue to experience below trend economic growth for some time as the world adjusts to lower leverage and lower consumption in many of the major economies.

We are already seeing more conservative borrowing and lending practices, which will constrain consumption and investment for some time.

In the United States, business investment has now fallen by more than 16 per cent over the last year – this is the largest fall since quarterly records began (in the 1950’s).

Fourth, we face the overarching challenge to address global imbalances.

Rebalancing savings and investment in key countries – particularly in Asia – to maximise sustainable global economic growth will be a key challenge.

This involves complex and sensitive policy matters, primarily focused on structural change and greater exchange rate flexibility in various major economies.

However unless we address these challenges as part of a collective global growth renewal strategy, we will remain vulnerable to further shocks.

Fifth, several major countries face significant fiscal challenges.

Rising fiscal deficits in the United States are beginning to increase the yields of long-term government bonds.

And there are concerns that this will lead to higher inflation in the future.

Medium term fiscal exit strategies to return budgets to balance will be critical for a long-term recovery.

Sixth, many economies will face the broader challenge of gradually exiting from the extraordinary policies they have put in place.

The last 12 months have seen the implementation of extraordinary global policy measures including unprecedented fiscal, monetary and financial market interventions.

As we move towards recovery, all governments will reach a point where these policies are neither sustainable nor desirable.

But their withdrawal presents a series of risks to global recovery, including potentially negative impacts on demand, risks to price stability, and continued threats to the recovery of global financial markets.

The withdrawal of these interventions must be timely and maximally coordinated to avoid unnecessary economic and financial market dislocations.

Seventh, developing countries entered this crisis later than many advanced economies, but the consequences of the crisis for them will continue to be severe.

Developing countries face a sharp reversal of capital flows and declining commodity export revenues.

Emerging markets as a whole are expected to experience net capital outflows in 2009 of more than 1 per cent of their GDP and will likely face a refinancing funding gap of $1.8 trillion in 2009.

Again, this was the burden of Bob Zoellick’s intervention yesterday.

These seven challenges represent potential roadblocks to recovery.

Unless we deal with these challenges as part of an effective coordinated strategy.

While collectively we may have responded effectively to the worst period of the immediate financial crisis, we will not be out of the woods until together we have built a credible path back to sustainable economic growth for the long term.

As we turn from crisis to recovery, we must therefore consider the great global governance questions of our time.

Are our existing institutional structures adequate to deal with the challenges we face?

Are our existing global policy and regulatory frameworks adequate to deal with these challenges?

Indeed, are our existing conceptual frameworks adequate to deal with the great challenges we face that now transcend much of the traditional ideological divide?

Taking the question of institutional structures first, the recent emergence of the G20 leaders’ process from the existing G20 finance ministers’ process has been a welcome development.

The G20 is an emerging global institution that balances the twin but often competing demands of efficiency and legitimacy.

The G20 is a broadly representative group – five European members; five from the Americas; five from Asia; and five from elsewhere (including Australia).

Its legitimacy is drawn from its representativeness.

It incorporates two-thirds of global population.

85 per cent of world GDP.

And it encompasses the world’s major faith traditions, including the largest Muslim nation in the world Indonesia.

Yet the G20 has remained small enough to work nimbly, rapidly and effectively in the face of the current crisis.

The Group of 20 – the G20 – had its origin in the Asian Financial Crisis of 1997.

The Asian Financial Crisis showed how quickly financial contagion could spread.

It also demonstrated the importance of coordinated responses.

In the immediate aftermath of the Asian Financial crisis, G7 Finance Ministers met in Birmingham.

They realised that action by the G7 was not enough – there were a range of systemically important countries outside the G7 whose collaboration was required – both developed and developing.

In many respects, this was the genesis of the Group of 20.

Its formal inception was here in Germany two years after the Asian Financial Crisis.

In December 1999, with the German and Canadian Finance Ministers as hosts, the first G20 ministerial meeting was held right here in Berlin.

In a perhaps prophetic statement, the inaugural chair of the G20 and then Canadian Finance Minister stated, "There is virtually no major aspect of the global economy or international financial system that will be outside of the group's purview".

So it is perhaps both symbolic – and significant – that almost exactly a decade later, and once again in Berlin, we are discussing the next phase in the G20’s evolution.

Since 1999 the G20 Finance Ministers and Central Bank Governors have been meeting annually.

The G20 has promoted open and constructive discussion between industrial and emerging market economies on key policy questions related to global economic stability.

Much of its work has been low-key but critically important to garnering the political support needed to progress major international economic policy initiatives.

The G20 was the circuit breaker in securing global agreement on limiting tax havens in 2005 – breaking a deadlock in the OECD.

It provided momentum and technical solutions that were critical in the IMF’s agreement on quota and voice reform in 2006 and 2007 – where the G7 was unable to do so.

And in 2004, the G20 adopted its own Accord – a valuable guiding document for the G20’s annual discussions of countries’ planned policy reforms, as set out in the G20 Reform Agenda.

The G20 therefore has a wealth of institutional expertise on the questions of financial crises and wider financial reform – an institutional expertise not easy to replicate elsewhere and, most critically, one which has been shaped by long institutional engagement between the major developed and emerging economies.

In the current crisis, it has shown its capacity to play a crucial role providing political will, policy coordination and institutional momentum to address the global challenges we face.

No institution is perfect.

And the G20 certainly is not.

But, to paraphrase Churchill, the G20 is the least imperfect of the various institutional alternatives on offer.

And we should build on it.

The G20 is an organisation that was born in crises.

The Finance Ministers process was born out of the Asian Financial Crisis.

And the G20 Leaders’ process was born out of the current global financial crisis.

In both settings, the G20 has shown that it can be a forum for action.

But as the G20 turns its focus to the post crisis challenges, it is appropriate to consider what tools the G20 will need to turn itself from a ‘fire fighting’ organisation into the kind of global institution that can address some of our longer term global economic challenges.

Beyond institutional change, however, we also need to consider the conceptual framework within which we discuss and develop policy responses to the future global economic challenges we face.

The current crisis has fundamentally discredited the notion of self-regulating global financial markets.

What we have witnessed in the current crisis is a conspicuous example of market failure on a grand scale.

A failure of regulation.

A failure of transparency.

A corruption of incentives within private institutions.

But the crisis must not be allowed to result in over-correction and to strangle the natural dynamism of properly regulated free markets.
In fact, the crisis has underlined the importance of rejecting free market fundamentalism on the one hand and “over regulation” on the other, which can choke off the vitality of the market economy and erect barriers to global trade and investment.

There is value in charting a global course between these extremes.

To identify a set of common principles which can guide our coordinated global response to the crisis and frame our efforts to restore positive economic growth.

This is why Australia welcomes global consideration of Germany’s proposal for a Charter for Sustainable Economic Activity.

We welcome the charter’s aim: to establish a framework to balance stability, growth and sustainability.

And we welcome the inclusive multilateral approach that Germany proposes in developing this charter.

The Charter aims to give the G20 a set of core values that can offer an overarching framework to address the range of future challenges that we are likely to face in the global economy.

If this Charter is to reach its potential, the voices of developing and non-G20 countries must be captured in these early stages.

It will need to be a living document open to all.

A non-binding framework that is responsive and adaptive to our developing understanding of what is needed to achieve sustainable growth.

In other words, a normative rather than statutory framework.

But with such a framework in place, collectively we are stronger to respond to the challenges that lie ahead.

Rather than constantly debating global economic policy from first principles, we would have an agreed conceptual framework that is anchored in the core principle of a properly and transparently regulated global market economy – one that maximises individual opportunity while minimising systemic risk.

Such a framework can help in:

Supporting macroeconomic stability and prevent crises from re-emerging, contain inflation, deliver sustainable economic and employment growth, and ameliorate inherently destabilising global financial imbalances between surplus and deficit economies.

Supporting sustainable public finance by providing a framework for returning budget deficits to balance across the economic cycle and to contain net debt within globally reasonable parameters.

Supporting properly regulated private financial markets which combine efficiency with transparency, strong oversight and global regulatory cooperation.

Supporting social sustainability, valuing employment, opportunity and fairness – also helping to sustain the necessary political constituency support for the inevitable vicissitudes that arise from open markets.

Supporting environmental sustainability as the global economy adjusts to a more carbon-constrained reality.

Supporting open trade and investment regimes that eschew protectionism.

Supporting developing countries and protect the poorest global citizens by providing greater access to global markets, better private capital flows and more effective development assistance.

In all these areas, it is the sustainability of global economic recovery that is key.

And sustainability is demonstrably an integrated concept across a range of policy domains.

Germany has a proud history in leading global accords.

Australia remembers the instrumental role Germany played in bringing together the historic 2004 G20 Accord.

We believe this new Charter concept can grow through careful nurturing both through the G20 process and beyond.

If achieved, such a Charter could reflect an historic convergence of developing, emerging and advanced economies’ views about what sustainable economic activity really means and how we go about achieving this common aim through properly coordinated national policy actions.

Such a public declaration would also help focus the future work of the G20 at summit level.

The task now presented to Leaders in the lead up to Pittsburgh is to secure as widespread support as possible for such a Charter – to help guide global policy decisions as economies emerge from the immediate crisis in the period ahead.

In this respect, with both an over-arching policy charter and a revitalised, more representative institutional structure in the form of the G20, we will arguably be better placed to deal with the many practical challenges that lie ahead.

The world needs a political clearing house to deal nimbly, quickly and effectively with the challenges that arise and break the negotiating stalemates that otherwise occur in technical negotiating forums.

The G20, galvanised by a new global charter on sustainable economic growth, offers the best mechanism to achieve this.

This morning I met Chancellor Merkel.

We discussed how our respective economies were weathering the global economic storm.

In Australia we have taken strong, early decisive action in financial markets, in fiscal and monetary policy and in labour market programs to deal with rising unemployment.

Australia has so far weathered the global economic crisis better than most countries.

According to the most recent OECD economic outlook:

Australia has the fastest growth in the OECD.

Australia has a lower budget deficit than any of the major advanced economies.

We have the lowest public net debt of any of the major advanced economies.

We have the second lowest unemployment of any of the major advanced economies.

And we are one of the few countries in the OECD to have so far avoided falling into a technical recession.

The Government’s early and decisive action to address the economy has helped to cushion Australia from the worst aspects of the global crisis.

Australia has achieved this through coordinated policy action at home involving:

First, stabilisation of domestic financial markets by providing guarantees for deposit holders and for banks’ wholesale funding. (In fact, of the world’s 11 remaining AA rated banks, four are Australian).

Second, a rapid reduction in interest rates by the Reserve Bank of Australia in the last 9 months by a total of 425 basis points.

Third, a three stage fiscal stimulus strategy involving 2 per cent of GDP in short term stimulus, just over 3 per cent of GDP in medium term stimulus and a further 1.2 per cent of GDP in long term nation building infrastructure.

Fourth, a rapid expansion of labour market programs focussed on retrenched workers, young Australians and particular high unemployment regions in what we call a Jobs and Training Compact.

The overall result of these measures is that:

Our economy grew in the March quarter at 0.4 per cent.

Unemployment has risen to 5.7 per cent.

Our budget deficit peaks at 4.9 per cent of GDP.

And our net debt will peak at 13.8 per cent of GDP.

However, 2009 remains a very stormy year ahead and none of our economies are out of the woods yet.

Chancellor Merkel and I also discussed Germany’s proposal for a global charter and the way Australia and Germany could work together and shape its future.

We also agreed that what we have been able to achieve in the G20 is a great example of how much both countries benefit when we work together.

This is for the simple reason that despite our different geographies, our different regions and our different histories, Australia and Germany have much in common.

We are both robust democracies and open economics.

We are both committed to making a real and positive difference to the global order.

We are both active participants in the institutions of our respective regions in Europe and Asia.

We both recognise that nations benefit more from cooperation than from a race to the bottom in politics and policies.

Last week Chancellor Merkel made a speech in Washington when she was honoured with an award for her contribution to trans-Atlantic relations.

In that speech, the Chancellor said that human dignity was the fundamental shared value on both sides of the Atlantic.

I’d like to think that even goes a bit further than that - the values Chancellor Merkel spoke of are very much shared in the Pacific as well.

And as Chancellor Merkel pointed out, this respect for human dignity influences our policy choices.

It influences the way we approach public policy at home.

It has a profound influence on our foreign policies abroad.

It shapes the way we craft economic policies – in particular in these times of crisis.

And it shapes how we approach critical long-term challenges like climate change.

It is fair to say that Australia and Germany don’t always turn to each other first when we think in terms of international relations.

Germany, naturally, has a significant focus on Europe and its environs.

Australia has been more focused on the dynamic and rapidly changing Asia Pacific region.

But there is no reason that geography should constrain our engagement.

And today Chancellor Merkel and I made that clear with agreement to work together more closely on the great global challenges that confront us all – challenges that increasingly are no longer constrained by geography.

We agreed today to strengthen our security engagement in Afghanistan and on counter-terrorism.

We agreed to strengthen our cooperation on seeking a global solution to the pressing threat of climate change and to closer collaboration on renewable energy, including solar research.

And we agreed that working together more closely on development assistance will help us to build a better and fairer world.

These are all global challenges where, by strengthening our cooperation, we can both deliver better results for the world.

Tomorrow I go to Italy to join other leaders in the Major Economies Forum.

This forum will focus on trade, on climate change and on food security.

I look forward to working with Chancellor Merkel at those meetings.

It is another example of the shared interests Australia and Germany have.

And another example of how our two great nations can work together in new ways in a new and expanding global partnership for the future.