3rd April 2009
The Malta Independent - Friday Wisdom
Miracles can happen! The world needs
one if the great expectations for a meaningful solution to the economic woes
that have thrown the world into a sudden deep recession, potentially a
depression, is to emerge from the meeting of the 20 leading high-income and main
emerging countries in London this week.
I am writing this piece on the eve on the summit but it will be published on the morrow. The London meeting of Thursday, 2 April could surprise us through down to the wire compromises leading to co-ordinated global approach to address a global crisis.
However the soundings from the main participants in the run up to the meeting, discounted as they have to be for their usual overdose of posturing, leave little room for optimism about reaching the great compromise.
The G-20 leaders seemed to be talking at each other, rather than to each other, with an air of misplaced superiority, arrogantly implying perfect knowledge about what needs to be done to achieve their home-spun silver bullet solution. They sounded like a football team without a coach and without a captain, lacking a coordinated game plan, and trying to force their view of the world on each other.
Some players proclaim they mean to play a game of defensive containment. Others proclaim an all out attack tactic. The rest mean to occupy the middle ground. Each grouping seems to be hoping that once the game starts the others will fall in line with magic coordination behind their preferred objective. In such circumstances confusion is more likely than co-ordination, irrespective of the wishful verbosity of any final communiqué to paper over the evident unbridgeable cracks.
It must not be so! There are long-term objectives on which it is easy to agree. Every country inside or outside the G20 would not disagree about the urgent need to re-design the world financial system and ensure a better regulatory regime to guard against a re-occurrence of such financial distress. This regulation must not only tighten on the already regulated banks, but must include other financial institutions which operate, so far largely unregulated, in the shadow banking system, including investment banks, hedge funds, private equity funds, credit rating agencies and tax havens.
There is no problem in agreeing that measures must be taken to ensure that banks and financial institutions that are too big to be allowed to fail, are not allowed to take risks that could involve taxpayers in expensive rescue operations. The current paradox where profits are privatised and losses are socialised cannot form a sound basis for a lasting solution. It will inevitably bring taxpayers out on the streets to protest the raw deal they are getting, and if it persists, democracy would roll-over to bring into power populists with dangerously too narrow view of the world.
However the Franco/German tandem is making a poor show pretending that current problems can be resolved by implementing tighter regulation to avoid a recurrence. When the house is burning the priority has to be on putting out the fire rather than writing a new fire safety code.
The EU has not been helped by the arrogant comments of the Czech presidency that the US (and UK) stimulus plans are a sure way to hell. This is not only disrespectful to fellow member UK, and to the new US President who has inherited these problems from the previous administration; it is also short on economic savoire-faire.
What the Czech presidency could have said without being offensive and shaming itself, is that the US type of fiscal stimulus plans solution is not suitable for general application across the EU. With the economies of the US and the UK being overly dependent on internal consumption for growth, it is obvious that consumption stimulus plans have to be part of the solution to their economic malaise. Such solutions are clearly less suitable for economies whose growth depends on export demand and who already have in place counter-cyclical social systems that kick in automatically to increase government expenditure through unemployment benefits and other social payments to those who are directly hit by the recession.
The Chinese, who together with Germany and Japan are the largest surplus countries, are caught in contradiction. They criticise the US for stimulating domestic demand as this risks diluting the long term external value of the US dollar, potentially damaging the value of their vast accumulation of foreign reserves largely denominated in US dollars, and could revalue their own currency making their exports less competitive. On the other hand they want to preserve their export dominance and still wish for the rest of the world to continue buying their excess supply.
How can China, together with Japan and Germany for that matter, not realise that their structural surpluses are the ultimate cause of the structural imbalances that led to the crisis? How can they continue to resist grand scale stimulation of domestic demand in order to dismantle their structural surpluses through trade and not merely through recycle financing?
If the G20 is to achieve anything substantial it must meet four objectives and prioritise them in the following sequence. Firstly it should condemn and where applicable reverse all measure of protectionism creating barriers to free trade. Such protectionism would hurt mostly the poorest countries that are not represented at the G20.
Secondly they must agree to a substantial, very substantial, increase in the resources of the International Monetary Fund (IMF) so that it can aid the poor countries that are unjustly affected by the crisis.
Then they must agree a substantial stimulus of domestic demand by the surplus countries to address chronic disequilibria and shift global demand to countries with greater capacity to borrow rather than continue to rely on countries that in reality need to rebuild their domestic savings to address their chronic deficits.
Lastly they must appoint a wide-ranging committee of experts to recommend the necessary changes for a more effective and globally co-ordinated financial regulation.
Anything short of this will require another G20 meeting in the near future.
I am writing this piece on the eve on the summit but it will be published on the morrow. The London meeting of Thursday, 2 April could surprise us through down to the wire compromises leading to co-ordinated global approach to address a global crisis.
However the soundings from the main participants in the run up to the meeting, discounted as they have to be for their usual overdose of posturing, leave little room for optimism about reaching the great compromise.
The G-20 leaders seemed to be talking at each other, rather than to each other, with an air of misplaced superiority, arrogantly implying perfect knowledge about what needs to be done to achieve their home-spun silver bullet solution. They sounded like a football team without a coach and without a captain, lacking a coordinated game plan, and trying to force their view of the world on each other.
Some players proclaim they mean to play a game of defensive containment. Others proclaim an all out attack tactic. The rest mean to occupy the middle ground. Each grouping seems to be hoping that once the game starts the others will fall in line with magic coordination behind their preferred objective. In such circumstances confusion is more likely than co-ordination, irrespective of the wishful verbosity of any final communiqué to paper over the evident unbridgeable cracks.
It must not be so! There are long-term objectives on which it is easy to agree. Every country inside or outside the G20 would not disagree about the urgent need to re-design the world financial system and ensure a better regulatory regime to guard against a re-occurrence of such financial distress. This regulation must not only tighten on the already regulated banks, but must include other financial institutions which operate, so far largely unregulated, in the shadow banking system, including investment banks, hedge funds, private equity funds, credit rating agencies and tax havens.
There is no problem in agreeing that measures must be taken to ensure that banks and financial institutions that are too big to be allowed to fail, are not allowed to take risks that could involve taxpayers in expensive rescue operations. The current paradox where profits are privatised and losses are socialised cannot form a sound basis for a lasting solution. It will inevitably bring taxpayers out on the streets to protest the raw deal they are getting, and if it persists, democracy would roll-over to bring into power populists with dangerously too narrow view of the world.
However the Franco/German tandem is making a poor show pretending that current problems can be resolved by implementing tighter regulation to avoid a recurrence. When the house is burning the priority has to be on putting out the fire rather than writing a new fire safety code.
The EU has not been helped by the arrogant comments of the Czech presidency that the US (and UK) stimulus plans are a sure way to hell. This is not only disrespectful to fellow member UK, and to the new US President who has inherited these problems from the previous administration; it is also short on economic savoire-faire.
What the Czech presidency could have said without being offensive and shaming itself, is that the US type of fiscal stimulus plans solution is not suitable for general application across the EU. With the economies of the US and the UK being overly dependent on internal consumption for growth, it is obvious that consumption stimulus plans have to be part of the solution to their economic malaise. Such solutions are clearly less suitable for economies whose growth depends on export demand and who already have in place counter-cyclical social systems that kick in automatically to increase government expenditure through unemployment benefits and other social payments to those who are directly hit by the recession.
The Chinese, who together with Germany and Japan are the largest surplus countries, are caught in contradiction. They criticise the US for stimulating domestic demand as this risks diluting the long term external value of the US dollar, potentially damaging the value of their vast accumulation of foreign reserves largely denominated in US dollars, and could revalue their own currency making their exports less competitive. On the other hand they want to preserve their export dominance and still wish for the rest of the world to continue buying their excess supply.
How can China, together with Japan and Germany for that matter, not realise that their structural surpluses are the ultimate cause of the structural imbalances that led to the crisis? How can they continue to resist grand scale stimulation of domestic demand in order to dismantle their structural surpluses through trade and not merely through recycle financing?
If the G20 is to achieve anything substantial it must meet four objectives and prioritise them in the following sequence. Firstly it should condemn and where applicable reverse all measure of protectionism creating barriers to free trade. Such protectionism would hurt mostly the poorest countries that are not represented at the G20.
Secondly they must agree to a substantial, very substantial, increase in the resources of the International Monetary Fund (IMF) so that it can aid the poor countries that are unjustly affected by the crisis.
Then they must agree a substantial stimulus of domestic demand by the surplus countries to address chronic disequilibria and shift global demand to countries with greater capacity to borrow rather than continue to rely on countries that in reality need to rebuild their domestic savings to address their chronic deficits.
Lastly they must appoint a wide-ranging committee of experts to recommend the necessary changes for a more effective and globally co-ordinated financial regulation.
Anything short of this will require another G20 meeting in the near future.
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