In 2009, G-20 leaders met in Pittsburgh and emerged with a mandate ‘to be the premier forum for international economic cooperation,’ endowing the G-20 with a leading economic role on the global stage. It appeared at the time that the leaders of the G-20 had successfully defeated pessimism. However, the rising tide of global economic turmoil and problems ranging from sovereign indebtedness to consumption and saving imbalances have created a ‘perfect storm’ that is far from abating.

The question before the G-20 summit in Cannes this year is whether to just distribute life jackets or endeavor to overcome political differences and set forth a concrete, viable roadmap that genuinely addresses the range of outstanding global economic security risks. Such a roadmap could go a long way towards countering the uncertainty that has gripped the global economy.

 

Although it is difficult to measure the economic effects of uncertainty, Professor Steven Davis at the University of Chicago Business School has created a ‘policy-related economic uncertainty index’ which underscores the fact that policy uncertainty exacerbates market volatility and has a negative impact on economic growth and the prospects for recovery. His data reveals that there were clear jumps in index values around the Lehman bankruptcy and TARP legislation, the Eurozone crisis and the U.S. debt-ceiling dispute. Looking ahead, Professor Davis’ estimates show that an increase in policy uncertainty foreshadows large and persistent declines in aggregate outcomes, with peak declines of 2.2 percent in real GDP, 13 percent in private investment and 2.5 million in aggregate employment.

Given these projections, as G-20 leaders struggle to address a range of economic issues that threaten global recovery, they might consider that continued policy paralysis exacerbates uncertainty and undercuts market confidence. Adding to the general sense of economic anxiety is the feeling that policy makers continue to be misdiagnosing the underlying problem.

For example, with regard to the immediate hurdle of the sovereign debt crisis, leaders appear to be primarily addressing a symptom – lack of liquidity, rather than the underlying cause – a lack of solvency. Only last week Germany’s Angela Merkel stated, ‘The path is closed for using the ECB to ease liquidity problems.’ At the same time, two top Federal Reserve officials argued that the U.S. Central Bank should again consider resuming purchases of mortgage backed securities, in other words, QE3.

Admittedly it is difficult to distinguish between illiquidity and insolvency when dealing with countries; but there is, in fact, a difference and the responses to each can have crucial repercussions. Pumping liquidity in the ocean of debt will not improve solvency; instead it carries the danger of added inflationary pressures which further feeds economic turbulence. While debt restructuring may be unpalatable to creditors, it is, in all likelihood, a reality. Facing up to this reality with a transparent and viable plan can help diminish the uncertainty that is paralyzing private sector activity and fueling volatile market sentiment.

Furthermore, uncertainty often breeds fear and fear begets the temptations of protectionism. In this context, G-20 leaders could consider openly embracing the fact that tackling the economic issues that are plaguing the global economy does not mean reducing economic openness and integration in the world economy.

Richard Fisher of the Federal Reserve Bank of Dallas underscored the belief that uncertainty is a leading driver of stalled economic recovery when he said: “Right now, nobody knows what the tax regime is going to be. Nobody knows what the spending patterns are going to be. No one knows how much regulatory change is going to take place. The greater the clarity, the more you remove a factor of uncertainty. Even if (businesses) don’t like it, they’ll figure out a way to navigate their way through it. Right now, there are no decisions being made. And it undermines confidence.” While he was referring to circumstances in the U.S., his sentiment is just as applicable to much of the global economy.

At the end of the day, resolving the challenges facing the global economy requires a political solution. While it is difficult to determine whether such a solution will completely counter uncertainty, we do know that from whatever perspective one considers the choices to be made, they will not be easy ones. But difficulty is not a reason for inaction. Developing and implementing a viable roadmap that will help policy makers and business leaders navigate the maelstroms of this storm will go a long way towards reinvigorating sustainable economic growth and strengthening global economic security.

Alexander Mirtchev is President of the Royal United Services Institute for Defence and Security Studies (RUSI) International, President of Krull Corp., and a member of the Atlantic Council’s Board of Directors and Strategic Advisors Group. This commentary was originally published on RealClearWorld.