Gayle Allard. Professor. IE Business School
2 April 2009
When the leaders of 19 of the world´s largest economies and the European Union meet in London April 2 faced with the worst economic data the world has seen since the 1930s, they will be deeply divided over how to face the crisis.
The United States, Japan and Britain are pressing for a joint fiscal effort by the G20 nations to pull the global economy out of its deepest crisis since the Great Depression. With industrial production continuing to collapse in the world´s largest economies and with exports falling at double-digit rates in Germany, South Korea and Japan, the view of these nations is that unless measures like the giant U.S. (or Chinese) fiscal stimulus package are taken quickly, the slide into world depression is inevitable; and recovery could take years.
In contrast, Continental Europe insists on rapid steps to crack down on tax havens and regulate financial markets, which according to one recent estimate (the Asian Development Bank) have destroyed global wealth equivalent to 100% of world GDP since the subprime crisis began. France, Germany and the EU representative agree that rather than going further into debt to spend their way out of recession, G20 nations need to quickly develop strong regulatory standards to prevent future financial speculation and restore order to markets. Australia, meanwhile, will put forth a plan to buy and concentrate toxic assets in “bad banks” and recapitalize the banking system. The United States and Britain agree to these steps in principle, but are likely to oppose global financial standards and will stress that ending the crisis with fiscal stimulus has a higher priority.
The different positions make it unlikely that the G20 will reach a historical agreement that will send a strong signal of hope to markets. However, it is likely that the summit will bring consensus on reforming and recapitalizing the IMF so that it can lend more freely to cash-starved developing countries; and that the amount of trade financing available in regional development banks will be raised substantially. These steps are good news, as they would boost world trade at a time when exports are plummeting in many nations that depend on net exports for economic growth.
There is also hope that the G20 will lead a call to protect free trade as pressures for protectionism mount in nations gripped by the recession. Attempts in crisis-stricken nations to protect national output by buying only locally produced goods, by using financing and other tools to favor domestic industry, could lead to a 1930s-style protectionist war, which will only deepen the recession. There is also a chance –admittedly low on the agenda given the crisis—that G20 could advance toward a new climate change agreement to replace the Kyoto Protocol.
If the London summit ends in agreement on clear measures, it would transmit confidence to world markets and give multilateral institutions the mandate and resources they need to help revive financial activity, world trade and consequently economic growth. If it fails, the deepest recession in decades is likely to become even deeper... and longer.