TELEGRAPH 30.3.09
G20 unity spells end of Brown's 'New Deal'
Gordon Brown's plans for a $2 trillion (£1.4 trillion) "New Deal" to
revive the global economy have been quietly dropped to preserve the
facade of unity as world leaders gather in London for the G20 summit.
By Ambrose Evans-Pritchard
The US and Britain have both backed away from spending proposals
worth 2pc of global GDP, accepting that each country must find its
own way. White House officials confess that there is no chance of a
deal that entails further public debt.
"Nobody is coming to London to commit to do more right now. No single
number is sacrosanct," said Michael Froman, the US deputy national
security advisor.
[- - - - - - - - -]
The text reiterates the traditional pieties, calling for an "an open
world economy based on market principles" and a determined effort to
"resist protectionism". It comes as the World Trade Organisation
predicts a 9pc fall in global shipments this year following a violent
plunge in the last quarter of 2008.
The pledge to uphold free trade has already been cast into doubt by
China, which announced a raft of export tax rebates on Friday to
shore up exports.
The protectionist move is likely to irk Washington. There is
grumbling on Capitol Hill that the US stimulus is leaking out to
surplus states in east Asia and northern Europe which seem to be
counting on American demand to rescue the world again. [This was the
worry that I, personally, expressed a couple of days ago. The USA
is NOT going to finance a global recovery if Germany and China, who
have massive reserves, don;' do their part -cs]
But the two sides are so far apart in their diagnosis of this crisis
that no real agreement seems possible. German Chancellor Angela
Merkel said over the weekend that the "German economy is very reliant
on exports, and this is not something you can change in two years. It
is not something we even want to change".
Czech premier Mirek Topolanek, holder of the EU presidency, attacked
the US fiscal plan last week as the "road to Hell". Europe's leaders
insist the region is already doing enough since generous unemployment
payments - starting at 80pc of earnings in Germany - act as an
automatic stabiliser.
The problem is that job losses lag the downturn by several months. By
the time the stimulus kicks in, it may be too late. Washington
believes that this emergency calls for a radically different approach.
==============================
THE GUARDIAN 30.3.09
On eve of G20 summit, new blow to Gordon Brown
Senior cabinet members dampen expectations of global spending deal
. Allegra Stratton and Ian Traynor
Ministers were struggling to maintain momentum for the G20 summit
last night after it emerged that any spending decisions would be
deferred to a later meeting, further narrowing the scope of this
week's London talks, which have been plagued by divisions between
European leaders and Gordon Brown.
Yesterday, Kevin Rudd, the Australian prime minister who will hold
pre-summit talks with Brown tomorrow, said it was now up to the
International Monetary Fund to determine how much additional support
the world economy would need next year, and that there had never been
any expectation that the decisions on that package would be taken in
London.
Ian Traynor on differing approaches to the financial crisis Link to
this audio
"That was never the intention," he said. "A mechanism has been
established for us to reflect on for what we need for the future.
There will be a further summit, well in time for 2010, I assume,
which will actually look at what metrics, what numbers, will be
needed then." [So what are thedy all coming here FOR then? Vast
expense and a massive blow to world confidence? If he's right the
stocks markets will collapse! -cs]
Silvio Berlusconi, the Italian prime minister, has already suggested
that the G20 leaders meet again in Sardinia in July at the end of the
scheduled G8 summit, but yesterday Downing Street suggested that a
further summit at which this week's issues might be revisited would
be unlikely to be held before 2010.
Yesterday cabinet ministers including the foreign secretary, David
Miliband, the chancellor, Alistair Darling, and the chief secretary
to the Treasury, Yvette Cooper, stepped in to dampen expectations and
tried to clarify the aims of Thursday's G20 meeting. All said it had
never been about securing agreement on extra public spending.
[Really? You could have fooled me! -cs]
"This is about trying to tackle an exceptional economic crisis ...
This G20 summit was never about writing national budgets," said
Miliband.
Darling said that it was important not to be "overly optimistic"
about what could be achieved. "It is important, but it is not the end
of the process. It is part of a continuing process," he said.
Cooper said: "What we are not going to have is a process in which
finance ministers are writing their budgets in the course of next
week. That was never the process that you go through." [SHE runs
true to form, mouthing the prepared soundbite! -cs]
Downing Street maintains that the prime minister has never regarded
greater public spending as the only option. However, opposition
parties point out that at times, during the run-up to the G20, No 10
has indicated that Obama's call for fiscal stimulus programmes should
be "sustained until demand is restored".
Tim Geithner, the US treasury secretary, had at one point suggested
an average 2% stimulus this year.
The EU has said it will not be going further than the measures
already announced, which amount to 4% of the EU's combined GDP.
Last week any suggestion of a fresh round of global stimulus was
thwarted by an unlikely coalition of the Bank of England's governor,
Mervyn King, the German chancellor, Angela Merkel, and the Czech
prime minister and EU president, Mirek Topolanek, who all spoke out
separately.
Speaking to a regional congress of her Christian Democratic party in
Berlin at the weekend, Merkel said: "The world stands at a watershed.
We cannot afford crises like this every 10 years. We need a global
order for the financial markets, the likes of which we've never seen,
in order to learn the lessons from this disaster."
The EU will be heavily represented at the G20, occupying more than
one third of the seats - the UK, Germany, France, and Italy as well
as Spain and the Netherlands plus the Czech EU presidency and José
Manuel Barroso, the European commission chief. European leaders are
worried that Obama's huge public spending programmes could fuel
hyperinflation and leave Europe struggling to refinance colossal
levels of state debt if they followed suit.
At the weekend Michael Froman, a senior White House official dealing
with the G20, continued to insist on fiscal stimulus, although the
timing of countries' spending plans was left vague. "First is putting
in place significant stimulus to get growth going," he said.
"Secondly, fixing each of our financial systems to get lending
flowing; third, avoiding protectionism; and fourth, taking steps to
minimise the spread of the crisis to emerging markets and developing
countries."
The communique will also contain broad commitments that countries
should follow globally agreed principles on bank capital ratios,
reshaping executive bonuses and national regulation.
[- - - - - - - - -]
=====================
TELEGRAPH 30.3.09
G20: Our leaders must ensure we don't take the road to a repeat of
the 1990s
This week sees another milestone in the continuing saga of the slump
- the G20 Summit in London, hosted by our Prime Minister and attended
by the heads of government, finance ministers and bank governors of
the most important countries in the world. What can we expect from it?
By Roger Bootle
What the Prime Minister would like to emerge is a globally co-
ordinated plan for recovery. One element of this is fiscal expansion.
As consumers and businesses around the world batten down the hatches,
the Keynesian solution is for governments to do the reverse, by
cutting taxes or increasing spending, thus increasing their borrowing.
In my view, this is the right response to the crisis - in principle.
The finances of governments are not the same as the finances of
households because governments can and should take into account the
effect of their actions on the rest of the economic system. More
spending by them may "cost money" but if this results in extra
spending for the system as a whole which causes the employment of
resources which would otherwise lie idle then, far from costing
money, the measure will save it.
Nevertheless, there are all sorts of arguments against fiscal
expansion - of varying force and current applicability. One of them
is that if such a stimulus does boost demand then much of the benefit
will leak abroad through imports. But clearly this is not an argument
that can apply to the world as a whole. If the fiscal boost were
proportionate across all countries, then your country's leakage would
be offset by the leakage from other countries' leakage to you. Hence
the importance of co-ordination.
The ultimate objection to fiscal stimulus packages is that they
endanger the solvency of the state, thereby giving rise to fears of
default. Indeed, if such a prospect is realistic then the stimulus
package may not work.
We are not yet at that point in the UK - but nor are we a million
miles away from it. Given that we may have to endure several years of
borrowing of £200 billion a year or more, I am now forecasting that
our debt to GDP ratio will be at 100pc within four years. And that is
without factoring anything in for further financial bailouts.
Accordingly, although I would not rule out minor expenditure or tax
measures in the coming budget, a repeat of last autumn's fiscal
expansion wouldn't be a good idea.
But all countries are not in the same position. Some countries' debt
to GDP ratio is not set to deteriorate as much as ours. Moreover,
amidst all the sound and fury about the evils of debt, a key
macroeconomic point has been lost sight of. Putting it starkly,
"excessive" spending by America, the UK and others, financed by
borrowing, kept the world afloat.
If you take that away then just who is going to spend? The answer
should be the countries which have been saving heavily and in the
process forcing others into deficit. The sense of superiority in
Germany's position on this is simply nauseating. "If only other
countries, and especially you Anglo-Saxons, would run a trade surplus
like us then all would be well." But the whole point is that this is
logically impossible. For a country to be running a trade surplus
then others must be running a deficit.
In absolute terms the world's largest trade surpluses are run by
China and Germany. As it happens, the fiscal position of both these
countries will support a further increase in government borrowing. We
should not be bashful about urging this upon them, while
simultaneously saying that we cannot do much more ourselves. We have
done more than enough for world demand already.
Over and above this objective, the conference should establish a
framework for co-operation between countries, in particular between
America and China, whose relationship is at the centre of what has
gone wrong - and of what will determine our fate over the years ahead.
A third aim should be to boost private sector confidence. This is
more easily said than done. It certainly won't be achieved by issuing
communiqués which urge us all to be confident. The fact of
international co-operation, and the sense that those who might easily
be wary of each other are coming together to find a joint solution,
is the fundamental requirement. Efforts should concentrate on
sketching out a path back to a healthier world economy, involving
more balanced trade. Once the private sector believes that something
along these lines will happen then the natural buoyancy of dynamic
capitalist economies will do much of the work.
Am I optimistic? No. I have a dreadful feeling that nationalistic
politics and real differences of opinion will combine with a host of
petty factors to cause a flop. There are ominous signs: the Russians
smarting at being relegated to the second tier of countries;
President Lula of Brazil saying that the crisis has been caused by
"white people with blue eyes"; popular rage at bankers and the
continuing raggedness of President Obama's administration inhibiting
serious American leadership; and our Prime Minister being hemmed in
by the ghastliness of our own economic situation.
I am fearful that the conference will become side-tracked onto issues
of financial regulation, hedge funds, short-selling and bankers' pay.
When thinking about the new world order such issues are certainly fit
for international discussion. But the first imperative is not this
but rather to boost world aggregate demand.
And there is a worrying precedent. The London Monetary and Economic
Conference commenced on 12th June 1933, nearly four years after the
stockmarket crash of 1929 and nearly two years after the financial
crisis of 1931. 66 countries sent delegations. The British Prime
Minister, Ramsay MacDonald, hosted the conference.
The conference's three aims were to revive global trade, stabilise
commodity prices and restore the Gold Standard. It failed. The sheer
size of the gathering didn't help. Each country gave a 15 minute
opening speech, which was then translated, with the whole thing
stretching over four days. Crucially, Europe and the US disagreed
over the currency question. Whereas the former wanted a return to
fixed exchange rates, the US wanted to devalue the dollar to reduce
real debt and to protect industry with tariffs. The conference's
failure provoked a global collapse in confidence, a series of
competitive devaluations and a retreat to protectionism.
I would be surprised if this conference will look so obviously like a
failure. If nothing else, the official PR machine will surely see to
that. But if the participants leave it with the conviction that
international co-operation is dead, they will then conclude that they
have to look to their own devices. In that event you should be afraid
- very afraid. Then we really would be on the road to repeating the
1930s.
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roger.bootle@capitaleconomics.com
Roger Bootle is managing director of Capital Economics and economic
adviser to Deloitte.
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