World leaders are descending on London, just as anti-capitalist protesters prepare to unfurl their banners. Barack Obama, who remains widely popular at home and abroad, met Gordon Brown, the British prime minister, on Wednesday April 1st. Mr Obama conceded that “We're not going to agree on every point”. On the eve of the G20 summit the two men should be concerned that too little is being done to respond to the worst economic slump since the 1930s. This week the OECD, for example, concluded that global output will shrink by 2.7% in 2009, sharply down on previous estimates.
As worrying, the various leaders gathering in London are not agreed on how to sort out the economic mess. One risk is that the group, if it seeks consensus, will produce an anodyne statement that adds little or nothing to the existing efforts to respond to the global slump. A greater risk is that the summit is so badly divided, and the outcome is so feeble, that dashed expectations actually worsen confidence.
Broadly, the leaders are trying to tackle five sets of issues. The first, and perhaps least contentious, is the need to recapitalise banks and get credit flowing. All big countries with troubled banks have acted assertively on this. America, long the laggard, at last has a detailed plan that has been, mostly, well-received. Now it is a question of waiting to see whether and how the bail-outs, more lending and other initiatives will help to stimulate economies.
But no consensus exists on the need for fiscal stimulus. Just how much governments of rich countries should borrow and spend to boost their economies is disputed. America would like them to commit to stimulus packages of 2% of GDP for this year and again for 2010. But Germany and France disagree vehemently. They argue that their economies rely much more on what are known as “automatic stabilisers”—tools such as unemployment insurance payments, which increase automatically in a recession—thus they do not need as much discretionary stimulus spending as countries, such as America, where welfare payments are much less generous. Deep differences remain. On Tuesday the Japanese prime minister, Taro Aso, said that Germany’s reluctance to use public spending aggressively stemmed from its lack of understanding of the importance of fiscal mobilisation.
A failure to agree on co-ordinating fiscal plans opens the door to forms of protectionism in stimulus packages motivated by worries about stimulus benefits “leaking” abroad. Such policies could complicate the G20’s efforts to come up with ways to deal with what is already the biggest collapse in trade since the second world war. That collapse is not the result of countries imposing tariffs or devaluing currencies, as happened in the 1930s. Still, the World Bank has tracked the actions of the G20 countries in recent months and found that 17 have taken steps that retard trade, often by subtle means. Thus the leaders in London need to commit to much more than a vague promise to resist protectionism. Ideally, they will lay out a comprehensive list of measures going beyond tariffs and export subsidies—to include, for example, domestic subsidies and discriminatory procurement provisions in stimulus packages—and commit to not use them even where permitted by their existing international trade commitments. A general commitment to free trade, though welcome, would not suffice.
On financial regulation, transatlantic differences have narrowed, with America agreeing to broaden its scope to encompass institutions such as hedge funds. But open disagreement remains possible. Mr Sarkozy’s reported threat to “get up and leave” rather than endorse a G20 statement that promises too little on regulating financial markets could make it all the harder to get a deal on fiscal stimulus.
The last big issue for the G20 is what to do about the dramatic collapse in financial flows to developing and emerging economies, the largest of which are represented in the group. The least contentious part of the response is likely to be commitments to meet aid budgets and support more lending by institutions such as the World Bank and the regional development banks, possibly through greater rich-country lending to these institutions.
More fraught, though within reach, are efforts to augment the resources of the IMF and to get the fund to deploy this money rapidly, something which emerging ones are ambivalent about. Success will probably involve getting China to offer to lend the IMF a large sum of money from its massive reserves. But this is unlikely without at least a clear promise of more say in running the fund, hitherto an institution dominated by Europe and America. Reform of the fund will mean giving emerging members more vote shares. Inclusion as part of the Financial Stability Forum, a group of regulators and central bankers charged with the technicalities of financial supervision, may also make them more willing to support an expansion of the fund. But China and other large emerging economies want more than incremental reform. Aware of the complexity of negotiating far-reaching changes to vote shares at the IMF, they would like interim measures demonstrating good faith, such as a commitment to let the leadership of the fund to be decided “irrespective of nationality”. But this is something that G20 finance ministers failed to endorse at a meeting in March.
http://www.economist.com/finance/PrinterFriendly.cfm?story_id=13401931
JPTF 2009/03/02
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