If the G-20 can agree on better regulations for derivatives and risk transparency, and issue a statement against protectionism, that would be enough to call the upcoming summit this week in London a qualified success.
The modesty of this fairly limited set of goals is driven by the current divide between the US and the UK on one hand, and the rest of Europe on the other. The essence of that divide? The United States and the United Kingdom would like the European Union and other key G-20 members to pass another round of fiscal stimulus. The E.U., however, shows little inclination to commit to another stimulus, at least not immediately.
Australian Prime Minister Kevin Rudd said a future G-20 meeting would likely be needed to gain an agreement on additional fiscal stimulus, Marketwatch.com reported Monday. There was "never the intention" for the meeting this week to produce a fiscal stimulus agreement.
A major reason for the Atlantic divide on fiscal stimulus is the vast difference in social safety nets. Many E.U. member states, Germany and France among them, have extensive safety nets that cushion the impact of unemployment, As a result, unemployment causes individual hardship, but not the individual economic devastation that it causes in the United States. Hence, a 10 percent unemployment rate in Germany is not as damaging to GDP and society as a 10 percent jobless rate in the United States, creating less need for stimulus. Another reason for Germany's and France's fiscal stimulus reluctance? As the wealthiest countries in the the euro-zone, the two are concerned that they'll have to bear the bulk of the cost of the stimulus plan, essentially subsidizing other, less-affluent euro-zone members, particularly Italy and Greece, and the Eastern Europe economies.
China too balks at more stimulus
Further, from the east, only a modest amount of additional stimulus is expected. Fu Ying, China's Ambassador to the United Kingdom, told the BBC the world should not expect additional stimulus from the rising economic giant.
"We are running the largest fiscal deficit that we have seen in 20 years," she told the BBC Sunday. "People should remember that China is still a developing country."
If China doesn't change its stance, that would be disappointing news. China has the capacity to allocate at least another $400-500 billion in fiscal stimulus, and that boost, combined with a $200-300 billion stimulus package from Japan, would provide the global economy with most of what it needs from Asia to end the global slump.
FT.com reported Sunday that a 24-point draft G-20 communiqué contained no specific call for fiscal stimulus, but states that fiscal measures already in place will increase global GDP growth by two percentage points and create 20 million jobs.
Economic Analysis: While agreements on regulation, trade (anti-protectionism), banking reform, and extra money for both the IMF and World Bank would be welcome, it will be hard to consider the G-20 summit a complete success without additional fiscal stimulus. Given the depth of the contraction -- global GDP will likely decline by one to two percent for the first time since 1945, with trade plunging up to 10 percent -- a failure to agree to at least $1 trillion in collective fiscal stimulus would be tantamount to the G-20 'kicking the can down the road' -- hoping growth will revive by the next meeting, in order to avoid the additional stimulus cost. That's a policy stance that risks a prolonged global recession into 2010, if it backfires.
Moreover, the above underscores that the economic psychology is not good heading to the summit. Europe and China apparently believe the world can pull out its slump, absent additional stimulus. Conversely, the U.S. and the U.K. both argue that absent multiple, new engines of growth in the euro-zone, Asia and in Latin America, the global recovery will be delayed, and that's the view from here as well. The era of global growth fueled by debt-based U.S. and U.K. consumption is over, and the sooner the G-20 recognizes this reality, the better.
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