There's a cloud hovering over the G20 meeting of global leaders, which starts in Buenos Aires on Friday. The world economy is slowing, threatening an end to the long recovery from the financial crisis. The markets share some of these fears. Global equities suffered a heavy selloff this fall as investors started to weigh the risk of recession in the next year or two.
These concerns raise an important question among aficionados of a multilateral world: If the economy entered a new downturn, would national leaders – in the age of US President Donald Trump – be able to orchestrate a global response? The obvious precedent is the G20 summit in London in 2009, when participants put together a $US1 trillion ($1.4 trillion) package of fiscal stimulus that helped avoid a more cataclysmic downturn.
Such global teamwork would be invaluable for a "mere" recession too, as well as any full-blown crisis.
This month, the OECD's twice-yearly "Economic Outlook" included a useful simulation of how a coordinated monetary stimulus would work. It imagines that all countries would expand fiscal policy by 0.5 per cent of gross domestic product for three years, which would raise global output by a similar 0.5 per cent in the first year. It stressed the need for haste.
But how likely is such early planning and coordination?
Martin Sandbu, a Financial Times commentator, is sanguine, noting that the US and China have shown recently that they're willing to do fiscal stimulus. He thinks the main foot-dragger would be the euro zone, which failed to coordinate fiscal policy effectively during its sovereign debt crisis, forcing weaker countries like Portugal and Spain to bear the brunt without much help from Germany, the Netherlands and their northern European ilk.
My main worry lies elsewhere. It would be a huge surprise if Trump wasn't the biggest holdout. His disdain for multilateralism is already undermining the rather shaky effectiveness of G20 summits and has left the global economy on the brink of a trade war. If that's how he acts during a recovery, imagine a crisis.
At a recent conference, Barry Eichengreen, an economist at the University of California at Berkeley, offered up three reasons why we should worry about a severe downturn with Trump in the White House.
The first is the most obvious: Protectionism.
One of the most important achievements of leaders after 2008 was to avoid the kind of beggar-thy-neighbour, nationalist response that marred the 1930s. Were US unemployment to rise sharply as the result of a downturn, Trump would almost certainly slap higher duties on foreign goods. That could easily trigger a disastrous domino effect across the world.
The second concern is monetary policy.
Central banks responded to the financial crisis by slashing interest rates and embarking (eventually, in the case of the euro zone) on non-orthodox measures such as quantitative easing. All of this would probably be possible under Trump, a vocal critic of the US Federal Reserve's raising of interest rates. What might not happen, though – according to Eichengreen – is the swift opening of swap lines between the Fed and central banks in emerging markets to make sure the latter don't run out of dollars. Some US lawmakers think this is an unnecessary risk for the Fed's balance sheet. While many of those fears are unfounded, they may well constrain the Fed's ability to support a global recovery.
Finally, there are questions over the International Monetary Fund.
Would it be able to provide liquidity to those countries that lose market access during a downturn? The question isn't so much of willingness, but means. True, the IMF has lent money to Argentina this year without any significant US opposition. But would that be the same during an international crisis? At least the euro zone now has its own rescue fund, the European Stability Mechanism. But would an insular White House be happy to sanction similar rescues by the IMF outside of Europe? Or would China need to step in?
Of course, at times of crisis, self-interest can be a powerful driver to do the right thing. But it's much easier to start from a position of trust, rather than one of resentment where tit-for-tat appears the natural course of action.
We don't know when the next crisis will be, but the political climate is far less congenial than in 2009.