This is the mission of the G-20, which held its first economic summit in Washington on Nov. 15 (see my columns "The G-20 economic summit [1]" on Nov. 17 and "The G-20 economic summit [2]" on Nov. 24). The first hastily convened and inadequately prepared summit struggled for relevance amid the US presidential transition that had created a power vacuum. Although relatively harmonious, the first summit could not be expected to and did not achieve much in fighting the global crisis. Its major symbolic importance was the displacement of the G-7 by the G-20 in world economic governance, reflecting a seismic shift of relative economic power with great geopolitical significance.
One of the immediate actions mandated by the first G-20 summit was expanding the membership of the Financial Stability Forum (FSF) to include key emerging market economies (EMEs). The FSF, based at the Bank for International Settlements in Basel, was established by the G-7 in 1999, in the wake of the EME financial crises in the late 1990s, to promote international financial stability through information exchange and international cooperation. At its plenary meeting in London last week, the FSF decided to broaden its membership to include the G-20 countries as well as Spain and the European Commission.
In preparation for the G-20's second summit in London on April 2, the G-20 finance ministers and central bank governors met in Horsham, England, last weekend amid controversies swirling around the forthcoming summit's hotly contested agenda between the US and the EU. Their meeting was expected largely to paper over the US-EU rift over the major issues. In my next column, I will discuss the outcome of that meeting.
The US and the EU have publicly staked opposing positions on what the next G-20 summit should achieve. They are deeply divided on what needs to be done urgently to prevent the current crisis from becoming a depression and what preventive measures are required to circumvent future crises. The US, supported by Japan and China, wants the EU to follow its lead in injecting fiscal stimulus through massive government expenditures and tax cuts to jumpstart their economies. Its argument is that unless fiscal stimulus is global and overwhelming, at least 2 percent of gross domestic product (GDP) in 2009-2010, it won't be very effective. The US wants the International Monetary Fund (IMF) to monitor each country's quarterly progress in providing fiscal and monetary stimuli to end the recession.
The EU, especially Germany, on the other hand, argues, as does the opposition Republican Party in the US, that governments cannot spend their way out of the recession. The contention surrounding the efficacy of the fiscal stimulus is exacerbated by the deep split among top macroeconomists on the empirical validity of the Keynesian model of aggregate demand and supply, on which the argument for fiscal stimulus is based, and by the debate on the size of the Keynesian multiplier. The EU also argues that its social welfare and unemployment programs, more generous than those of the US, are already providing substantial stimulus through automatic stabilizers.
The EU, whose governing rules constrain its members' budget deficits and public debts, wants the second summit to focus instead on reforming the global financial system through wider and tougher regulation of financial institutions, including hedge funds. It blames the lax US financial regulatory system for the outbreak of the global financial crisis. The EU also wants, as a more urgent makeover of the financial system, rapid progress in getting toxic assets off banks' balance sheets so that they can start lending again. The US, which is getting ready to drastically overhaul its financial regulatory system, but without any G-20 involvement, opposes any supranational financial regulation.
The only issue the US and the EU agree on, with the strong support of Turkey, is the need to boost the financial resources of the IMF, doubling or even tripling them, to help especially the EMEs as well as poor developing countries hit hard by the global crisis. Even this issue could become contentious if the efforts to swell the IMF's financial resources get tangled in the reform of the IMF's outdated governance structure (see my last week's column "The IMF's role in combating the global crisis [3]").
Although they also agree on avoiding protectionism, an outcome of the first summit, in practice both sides have already violated that agreement.
Complicating the disagreement between the US and EU is China's concern that the massive government spending and budget deficits, coupled with an extremely loose monetary policy, in the US will lead eventually to accelerating US inflation and sharp dollar depreciation. Although supportive of public spending to combat the recession, China, as the major creditor of the US, is worried that its massive foreign exchange reserves, exceeding $2 trillion, invested primarily in US government securities, will suffer huge losses with the dollar's depreciation. China's unusually blunt public concern about the safety of its US assets elicited an immediate forceful defense by the US presidential spokesman that "there's no safer investment in the world than in the US." How the enormous and contentious US-China financial debtor-creditor interdependence evolves in the months ahead will affect the economic and strategic balance of power between them and in the rest of the world.
We should view the contention over the next G-20 summit from a much-needed historical perspective. The London World Monetary and Economic Conference of 66 nations, organized by the League of Nations, convened on June 12, 1933, to fight the Great Depression. It broke down amid acrimony between the US and European countries, led by France and Great Britain, concerning the settlement of intergovernmental debts, the stabilization of exchange rate fluctuations and the restoration of global trade flows. Many economic historians blame the economic nationalism of the US under President Franklin Roosevelt, backed by the US Congress, for the failure of that London conference in intelligent collective action.
Notwithstanding the smug claims of those who boast that they have surely learned their lessons from the mistakes of the 1933 London conference, let's hope that next month's London summit, which confronts strikingly similar problems that bedeviled the world economy 76 years ago, does not suffer the same fate.
