An agreement between G20 leaders over the speed and depth of deficit reduction and on stabilizing or reducing government debt-to-GDP ratios among developed countries, though subject to national vagaries, is nonetheless a clear and welcome declaration of intent. In time, the stimulus tap is to be closed, the state shrunk, and the market allowed to resume its lead role in the economy.
There is nothing that binds countries to commitments made in the final communiqué, which in fact specifically states that measures be "differentiated for and tailored to national circumstances." Japan, for example, was given "greater latitude" in meeting the commitment to at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. French President Nicolas Sarkozy claimed the targets were "goals rather than commitments." And while the United States agreed to the pledge, Tim Geithner, U.S. Treasury Secretary, and Lawrence Summers, director of the White House's National Economic Council, earlier opined on the need for "a commitment to reducing long-term deficits, but not at the price of short-term growth."
That is the challenge they all face: how quickly can deficits be reduced without harming growth? But the converse is also true: How long can they fail to reduce deficits without harming growth?
Almost all large national economies are expanding again, meaning that stimulus does less. Meanwhile the lagging impact of the spending that has already gone out the door - rising interest on debt payments - grows. That crowds out program spending, including on the social safety nets that face increasing strain in the most advanced economies. And higher deficits can lead to a tightening of private credit, putting further job creation at risk.
Fulfilment of the G20 commitment may prove elusive in some cases. However, as Stephen Harper said, there will be "market pressure" to conform to the G20 intentions. There is a positive inducement as well: OECD Secretary-General Angel Gurria told The Globe editorial board last week that "adjustments themselves are a relatively modest proportion of the economy," and that we "underestimate the positive impact a well-designed and well-defined adjustment program can have on confidence."
Failure to get national finances under control will harm offending economies. It may well be, then, less about form than substance than is apparent at first blush, and that would signify a victory not just for Mr. Harper, who pushed for the spending cuts, but to the global economy.
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