The World Isn't Up to Global Coordination

The Wall Street Journal

By PAUL HANNON

The global economic crisis seemed very far away as the sun blazed down on Marseille's old port Friday. But such is the depth of the gloom surrounding the economic outlook, finance officials from the Group of Seven leading developed economies must have envied the carefree souls piloting their yachts out of the harbor and onto calm blue seas.

For these officials, there is very little chance of a respite any time soon. Indeed, with panic gripping global financial markets, they were forced to backtrack on their original intention not to issue a communiqué and make a statement intended to reassure.

In it, they acknowledged that "there are now clear signs of a slowdown in global growth," and asserted that they were "committed to a strong and coordinated international response to these challenges."

But there are growing reasons to doubt this promise, and underlying the mounting global despondency is a realization that while very few parts of the world will be left unaffected by events in the euro zone, the U.S., Switzerland or anywhere else, the political responses are likely to be patchy and inward-looking.

The euro zone's inability to prevent and then respond to its fiscal crisis is a key reason for doubting that, at a time when links between national economies are deeper and more significant than ever before, the response of politicians will match.

After all, the currency area is the boldest experiment yet in attempting to coordinate economic policy closely, and under circumstances that are relatively favorable.

It is a bloc with a single central bank, a single market for goods, considerable scope for labor mobility and a high 
degree of integration in its financial markets.

On top of that, the currency area has an antecedent that goes back to 1956, driven by an imperative from the dreadful history of the first half of the 20th century, and boasting a track record of success in achieving its main goals, which are peace and prosperity.

Its leading politicians know each other well, and currently seem to spend more time in each other's company than with their children. For the most part, they share the same broad Christian Democratic outlook that has dominated the European Union since its early years.

But despite all the above, the euro zone is still a relatively loose association of states with peculiar histories and tensions, and its political leaders are obliged to defend the interests of the various states they govern. They have struggled to confront the mounting crisis, required as each of them are to attend to their national constituencies, and hold on to power through electoral cycles of varying degrees of intensity.

As a result, there are economic policy paths for the currency area that can never be considered, even if they are good ideas. One slightly unusual recent proposal has come from the Geneva-based United Nations Conference on Trade and Development. It argues that one of the fundamental causes of the euro zone's economic crisis is differential wage growth since the currency was launched in 1999.

Put simply, wages grew rapidly in Greece, Ireland and other economies that are now troubled, but only very moderately, if at all, in Germany. Companies in those economies that had experienced rapid wage growth were unable to compete with companies in those that hadn't.

UNCTAD's proposed solution is that German wages should now rise rapidly, which sounds like a bit of a vote-winner. Except that the German model is now based on a system known as Kurzarbeit, or "short work," and requires frequent changes in wages and hours.

Many Germans credit Kurzarbeit with the turnaround in their nation's economic fortunes from industrial museum to refreshed global powerhouse, and it's unlikely to be abandoned soon. It is especially difficult to envisage a politician advocating that it be dropped, and that even something as apparently attractive as wage rises be encouraged, if the argument were that it must be done for the good of the euro zone.

The G-7 also has a relatively long history, and its members broadly share a political and economic understanding. But it, too, has struggled to deliver meaningful governance of the global economy, and did so even before it was cast into redundancy by the rise of the big developing economies.

The G-7's redundancy was apparent once again in Marseille. The U.S. came to the meeting with President Barack Obama's latest stimulus program, no doubt anxious to see others join the effort. But many of the others were otherwise preoccupied: the euro-zone nations with their fiscal crisis, the U.K. with defending its all-or-nothing austerity program, Japan with clearing the way for more intervention to weaken the yen.

Nobody was at or close to the point of doing anything primarily intended to rebalance the global economy, despite most having acknowledged this as a primary objective for coming years.

And the situation is unlikely to change when finance officials from the G-20 meet in Washington later this month.

So perhaps it's time for a rethink. The economic history of the past few decades has been characterized by a steady progress toward more and more integration, within regions in the form of initiatives like the euro zone, and between regions in the form of freer trade and capital flows.

This has done some good; you can't argue that lifting hundreds of millions of Chinese workers out of poverty was a bad thing.

But it also has its very obvious dangers, chief among which is that politics and people just haven't kept up. In dangerous economic times like these, the policy response has proved woefully, almost pathetically, inadequate.

So just as the euro zone now seems a step too far in a basically good idea—perhaps a few decades too soon, rather than fundamentally wrong—we may have to find ways of halting or reversing globalization. We just aren't grown-up enough, xenophiliac enough or far-sighted enough to deal with it.

Write to Paul Hannon at paul.hannon@dowjones.com