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What Will New World Order Look Like? - WSJ.

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Updated June 18, 2012, 8:20 a.m. ET

What Will New World Order Look Like?

By SIMON NIXON

Leaders of the world's largest economies are gathering in Mexico for the latest G-20 meeting. WSJ's Simon Nixon expects little from them unless they consider a new world order that can tackle the financial crisis. Photo: Getty Images

Los Cabos in Mexico is by all accounts a delightful place: Chic hotels, excellent beaches and fine weather at this time of year. World leaders descending on the resort for this week's Group of 20 summit should make the most of what it has to offer. Nothing they discuss is likely to make any difference to the crisis raging in the global economy. The world is now a different place to 2009 when, at summits in London and Pittsburgh, the leaders of the world's largest economies believed they had "saved the world"—as then-U.K. Prime Minister Gordon Brown put it—with a massive fiscal and monetary stimulus and a comprehensive agenda to reform the financial system. At the time, the G-20's response was hailed as the start of a new world order. It may turn out to have been the last gasp of an old world order. That old world order began in 1944 at Bretton Woods in response to the Great Depression and the horrors that followed. One of its main architects was John Maynard Keynes, and his ideas have guided much of the current crisis response. The central challenge in the post-Bretton Woods era has been how to manage economies in the absence of the gold standard. The gold standard had many flaws, but the chief virtue of fixing the exchange rate and constraining the supply of credit was to stop politicians succumbing to the inevitable pressure to respond to crises by debauching the currency, resulting in long-term harm to the livelihoods and living standards of their citizens.

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Chinese President Hu Jintao, left, arrives at Los

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com/article/SB1000142405270230383640457747251. Bank of England Governor Mervyn King.K. Will they commit to the reforms needed to make their economies more competitive? Or will they try to cast off the shackles imposed over the past 2 din 3 30/07/2012 15:07 .'s Office for Budget Responsibility or. not the macro. It is their responsibility to ensure economies are competitive. politicians have had to accept debt brakes and other devices to limit borrowing and many have submitted to external surveillance by independent monitors such as the U. inefficient companies are shielded from market pressures. politicians need to recognize the importance of the supply-side powers they do possess: The true role of politicians lies in the micro. basic infrastructure is lacking. Although trillions of dollars of stimulus failed to deliver the expected recovery. To prevent a repeat of 1930s beggar-thy-neighbor protectionism.S. by the European Commission. Regardless of what happens in Los Cabos or in post-election Greece. In too many countries. Financial-sector reform was essential. the world is now at a crossroads.com http://online. governments yielded significant powers over trade policy to supranational bodies such at the World Trade Organization (previously the General Agreement on Tariffs and Trade) and the European Union. in one crucial respect. But stimulus alone can only provide a bridge while governments address the causes of economic weakness. All that stimulus has provided a bridge to nowhere.K. Indeed. On this score. The old order ended with the London and Pittsburgh G-20 summits. wages are too high. But the G-20 leaders needs to do far more. a financially illiterate populist such as Greek radical-left leader Alexis Tsipras is waiting in the wings. productive and not vulnerable to financial shocks via excessive debts. Restoring sanity to liquidity rules could free up hundreds of billions of dollars for "socially useful" activities. But the question for world leaders now is what the new world order will look like.wsj. voters have been conditioned to believe pain-free solutions are always available. Employment rules and trade-union pressure frustrate efforts to change working practices or cut costs. the G-20 has made the problem worse. infrastructure investment. governments ceded powers over interest rates to central banks.K. diehard Keynesians insist the answer is more of the same. under the euro zone's Fiscal Pact.WSJ. France. Maybe fresh market turmoil this week will lead to more monetary easing.What Will New World Order Look Like? . Few G-20 countries have used the time bought by past stimulus to make the vital supply-side reforms to boost productivity and competitiveness. Post-War economic history is the story of the quest to find new ways to bind the hands of politicians.. All politicians know the moment they drive an unpopular reform. welfare spending. In response to the inflation shocks of the 1970s and 1980s. most spectacularly in France in 1720. Only they can decide on the proper balance between social protections. vowing to defy economic and political reality. the high priest of the global regulatory onslaught. In the post-gold-standard world. reality is dawning on policy makers: Last week. Cabos airport in Mexico on Saturday for the seventh G-20 summit. Far from complaining about their lack of economic levers. the U. More recently. enabling banks to generate capital—and ultimately to lend. and particularly Japan. Previous experiments in paper money had ended in disaster. deficits or balance of payment crises. policy makers have delivered a profoundly pro-cyclical shock. but the G-20 went too far: In seeking perfection. Poor education systems and rigid immigration rules hold back the supply of skilled labor. What the current crisis is testing is how far modern democracies are capable of submitting to the discipline needed to maintain faith in their currencies. That hasn't stopped politicians continuing to look for easy solutions. U. Broken banking systems can't provide working capital or finance viable projects. Wasteful and corrupt bureaucracies act as a disincentive to investment. typically low productivity and weak competitiveness.. regulations and the appropriate burden of taxation. resulting in a deflationary credit squeeze. Yet politicians find this difficult to accept. politicians privately ask whether a Greek euro exit might provide an opportunity to push through reforms they don't have the courage to risk now. called for a rethink of the Basel liquidity rules that have led banks to hoard cash in ultra-low-yielding central bank reserves and government bonds. That is as true of the U. as it is of most of the euro zone. Italy and Spain clearly believe it will be easier to persuade Germany to underwrite their broken economic models with euro-zone bonds than to persuade their electorates to accept change..

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