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  December 11, 2011

The G20 and Global Policy Paralysis

Ilene Grabel: There's neither the political will nor the courage to take on the austerity and privatization policies pushed by finance
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Ilene Grabel is Professor of International Finance, co-director of the MA program in Global Finance, Trade, and Economic Integration at the Josef Korbel School of International Studies at the University of Denver (USA) and is a Research Scholar at the Political Economy Research Institute (PERI). She has published widely on financial policy and crises, developmental financial architectures, international financial institutions, and international capital flows and presently serves as a standing member of the Intergovernmental Expert Group on Financing for Development at the United Nations Conference on Trade and Development. Grabel's latest book, When Things Don't Fall Apart: Global Financial Governance and Developmental Finance in an Age of Productive Incoherence, was published by MIT Press.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. When one looks at the current meetings of European leaders, the political situation in Washington, or the recent G-20 meetings, I think what one sees is policy paralysis. There seems to be no policy that can be agreed upon that will forestall a global recession. Everyone seems to be on the austerity train. Perhaps that is a kind of policy, but certainly not one that meets the objectives they claim they have, which is more employment. If you would look at the G-20 meetings in particular, here's what Ilene Grabel wrote just a few weeks between those meetings. She teaches economy at the University of Denver. Here's what she said. "The G-20 seems to be outpacing the WTO in the march toward irrelevance." A little further on: "Key players in the G-20 soon got hold of themselves and repudiated their brief flirtation with Keynes by calling for 'fiscal consolidation' around the world. At the same time, serious efforts to deal with global financial reform stalled. Lost was the opportunity to deal effectively with the shadow banking system, derivatives, and commodity market speculation." Now joining us to talk about all of this is Ilene Grabel. She joins us from Denver. As I said, she teaches at the Josef Korbel School of International Studies at the University of Denver. Thanks for joining us, Ilene.


JAY: So if you look at this whole policy paralysis (what I'm calling it), focusing on the G-20's actually pretty good, because you have all the leaders of these 20 major economies. And in these last meetings, they didn't seem to get very far, even though they all knew they were on the precipice of this European meltdown. Talk a bit about about what happened there.

GRABEL: Sure. When the G-20 met in early November in Cannes, they had, of course, many important things on their agenda. And what we've been seeing is that at the last few G-20 meetings, including in the most recent one in November, there's been a game of kind of hot potato that's been played between the G-20, the IMF, the European Central Bank, and the leaders of Germany and France. And every time they meet in the context of the global crisis, they have failed to reach any clear decisions that would take the eurozone out of crisis and to deal with many of the important issues that have been on their agenda since the crisis really began in 2008. And at this last meeting in November, the G-20 ministers essentially handed the ball back to the European Union and the European Central Bank and the German and the French government. They've handed it back to be IMF. The IMF handed it back to the G-20. And at this point, we have a situation where nothing at all is happening, and we're seeing financial markets react to that uncertainty, because it's not clear who is going to take responsibility for getting Europe out of its financial malaise. It's clear that the IMF is not going to do it. European governments are not going doing it. And as we saw late last night, leaders of the European Union are also not prepared to take any steps to get the zone out of the crisis.

JAY: They seem to be caught behind a bondholder rock and a real economy hard place. If they don't have austerity and supposedly get their debts and house in order so the bondholders can be repaid, they're going to have their bonds downgraded and the interest get up to unsustainable levels. On the other hand, if they do austerity and they do all these things to please the bondholders, the real economy goes into deeper recession, in which case, they're going to get downgraded again, because they're going into recession. The whole fundamentals seem to be wrong here.

GRABEL: The fundamentals are certainly all wrong. I think that you characterized that correctly. And I think the even bigger problem is this kind of institutional lacuna. There isn't actually a space in the global economy for action to be taken. And so I think that's why we have this effort to shift the problem back and forth between the European Union and the IMF and national government, and no one of those entities actually has the political will or the courage or the imagination to actually deal with this problem, or the courage, for that matter. And so every day we find that we're watching for some decision to come out of some body, whether it's the European Union or the IMF, or to come out of the German and French dialog, and yet every day we're greeted with the kind of news that they're going to consider it, they have a new plan. We don't know what the plan is. No one knows what the plan is. And, of course, last night we had the announcement that some important European governments, like the English government, are not prepared to participate in these dialogs in any sort of meaningful way.

JAY: Well, is part of the problem that the finance sector, which is the dominant sector of the economy and the politics, I imagine that they've got this [incompr.] in a fistfight, and they go--they smack on one side of the guy's face, and then they say, okay, you'd better give us austerity or we're going to raise your interest rates on your bonds. And so, okay, they start to get that, and they go smack the other way, and they say, oh, look at this, you're going to be in recession; we're going to raise the interest rates on your bonds. I mean, the finance sector doesn't seem to want a solution; they just want to take advantage of the situation. Is that what's causing this policy paralysis?

GRABEL: I think that that's a big part of this, that the financial sector is using the opportunity, the crisis, to push forward on the kind of reforms that financial actors have long sought, which is to say, policies which give the financial sector far more power than it ordinarily has, pushes government into austerity, pushes government into dismantling the welfare state, pushes them into privatizing state-owned enterprises, and generally shrinking the public sector and public employment. So it certainly is an opportune time for financial actors to push forward on the kind of agenda that they have long sought in Europe.

JAY: So where do we go next with this? The G-20 seems to be out of any real decision-making or policy-making influence here. Europe seems--they've come up with this sort of agreement, but it seems to be essentially just for more austerity, and even that, who knows [if] they can really get it together. Where does all this lead to?

GRABEL: I think that we're entering a period where the crisis is actually going to intensify, that we may have hoped that all of the bad news was actually out, but I think we haven't seen the worst of this at all. The plan that was announced last night and that's being discussed this morning doesn't at all address the seriousness of the crisis in Europe. And, indeed, this morning the credit rating agency downgraded three major French banks. There was talks of downgrading further banks in Europe. There have also been studies which have shown that European banks have a huge deficit of capital and that they're seriously undercapitalized. That should make things far worse. And the European Union this morning is in much worse shape than it was in even last night because of the failure to reach an agreement. And so it's hard to imagine that European leaders can engage in some new round of productive dialog. After all, they failed to reach a decision at the most important moment last night. And so I think that they're very much out of the picture right now.

JAY: So some people are suggesting the Fed should come to--the American Fed should come to the rescue and buy up a bunch of these weaker bonds and stabilize the situation. What do you make of that?

GRABEL: I think that that is completely implausible. I think that--I understand that that proposal has been discussed. It's impossible for me to imagine the U.S. Federal Reserve actually taking on that role. U.S. Treasury Secretary Timothy Geithner has been making clear over the last couple of months that Europe's problem is Europe's problem. And given the political heat that he faced over the bailout in the U.S., I think it's just politically not possible for the U.S. Treasury and for the Obama administration to play any role in Europe other than to say we feel your pain at this point. But it's really impossible to imagine the Federal Reserve taking responsibility for buttressing the capital reserves of European banks or in any way facilitating any further activity by the European Central Bank.

JAY: But will they have a choice? Will they have--if this European situation triggers another global meltdown, which is what a lot of people are predicting, that means a profound American meltdown right before a presidential election. Can President Obama afford this? And does he not have to do something? Doesn't it become his problem, whether he thinks it's European or not?

GRABEL: Well, I think it is very much his problem, because we cannot separate the fate of European economies from the state of the American economy. So that's certainly true. But I think politically isolationist sentiment in the U.S. right now is such that it really prevents the president and the U.S. Treasury Department from taking any kind of decisive action that commits U.S. economic resources to Europe. I just don't think it's politically possible to do so, even though the failure to do so certainly has very serious negative ramifications for the U.S. economy.

JAY: So we stumble into a deeper global recession. That seems to be what the cards are saying.

GRABEL: I think that's clear. It's been fascinating over the last couple weeks to see Europeans go hat-in-hand to some of the largest and most rapidly growing developing countries. We know that European leaders have been really trying to pound the pavement in China, in Chile, in Brazil, saying, okay, we need your sovereign wealth fund money, we need your governments to buy up European bonds. And I think many of the rapidly growing developing countries' policymakers have very rightly suggested that they're not really interested in playing the role of bailing out Europe.

JAY: Yeah. I've heard some of the Chinese commentators apparently are saying, why don't we wait till it bottoms out, then we'll think about coming in.

GRABEL: Yes, I think that that's right. And it's clear that Chinese policymakers and policymakers in many other rapidly developing countries are quite rightly skeptical about the credibility of the eurozone's plan, and even the credibility of the entire eurozone project, and so they're not keen to commit any economic resources to stabilize Europe. We know that Brazil has very recently agreed to provide more funding through the IMF, but not directly to the eurozone itself because of the lack of credibility, the lack of commitment that eurozone leaders have really shown to take serious action to get out of the crisis.

JAY: So if you're ordinary souls watching this interview, what should people do?

GRABEL: Well, I think people should be worried. At this point, it seems clear that we're headed for a new round of crisis, coming this time from Europe. And this is really the time, I think, just to batten down the hatches. I mean, certainly we can try to influence debate in the US, to press our government to get more involved in trying to get the U.S. out of recession, to promote employment, to get behind the president's job promotion plan. But we are in a situation of political gridlock. And this is the silly season in the U.S. right now. It doesn't seem like the U.S. government is actually able at this point take steps that make any sense to get us out of the crisis. With the president being hammered on all sides by Republican candidates, it's really put him in a situation where he's paralyzed. And as you noted, eurozone leaders are also paralyzed. And so this is a time, I think, when we have real reason to be worried about the future of the world economy.

JAY: And when he had more control in D.C., a lot of people think he didn't take advantage of it.

GRABEL: Yeah. Yeah. There were certainly missed opportunities to make the case that getting the U.S. out of the financial crisis was in everyone's interest. That moment seems to have been lost in the U.S. right now, and I think that makes it even more difficult to imagine the U.S. government taking steps to try to stabilize Europe, because, after all, there isn't even a consensus among the broader populace in the U.S. that further steps need to be taken to get the U.S. out of its crisis.

JAY: Thanks for joining us, Ilene.

GRABEL: You're very welcome. Thank you.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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