London Calling

tardisGrab the popcorn for the start of the G20 London Summit beginning April 2nd.  This will be an important meeting because it serves as a test of the resolve of the major nations’ commitment to both global development and trade.  It will also be a test for new US President Barrack Obama and his administration.  There will be challenges from many of the countries on several fronts.

Obama has called for all G20 countries to pledge GDP-appropriate global fiscal spending. Germany is not convinced of a need for global fiscal stimulation having announced many are not bad off when compared to the US or UK.     Reluctance on the part of other nations to follow the lead will put pressure on the US to stimulate the much of the world’s economies as well as its own on its own.   Steven Harper of Canada as said that Canada’s doing fine.  Angela Merkel has criticized the US call for fiscal stimulus.  Early last week, the President of the EU, called the Obama plan “a road to hell.”  This has caused both the US and the UK to back off of specific commitments to global fiscal stimulus.  Developing nations have been begging the G20 for pledges to shore up their own economic crises.  There also appears to be a varying commitment levels to that idea.  This from China View.

But a transatlantic rift over the necessity of further fiscal stimulus appears to complicate efforts of the summit.

In response to U.S. pressure on the European Union (EU) countries to boost their fiscal stimulus, Czech Prime Minister Mirek Topolanek, whose country holds the current EU presidency, slammed U.S. plans to spend its way out of recession as “a road to hell.”

Topolanek’s blunt criticism exposed European differences with Washington and signaled a hard job for Brown to achieve greater international cooperation.

Playing down the transatlantic rift, British Foreign Secretary David Miliband said on Sunday Britain and the United States will not push G20 leaders to announce specific spending pledges.

In a preparatory meeting two weeks ago, G20 finance ministers and central bankers agreed to “take whatever action is necessary” to support the economy. They pledged to continue coordinated and comprehensive action to boost demand and jobs, adding the key priority now is to restore lending by tackling toxic assets in the financial system.

There is also commitment to enhanced regulation and development of global financial institutions and markets.  These goals are clearly stated in the G20 Communique. But there is a lot of criticism of the US Plan to make banks solvent and shore up US financial markets.  In today’s FTs, Wolfgang Manchau warned that banks are sinking faster than their governments can bail them out.  Yves reports in  Naked Capitalism that not only is there a problem with inadequate capitalization, but there are issues still with bank reform.

While I agree with his concern, that a contraction can slip into a vicious circle, focusing on recapitalization as the primary policy response is wrongheaded. The Swedish in their salvage operation not only took over dud banks and hived off the bad assets, but they structured those loans and sin some cases even extended more credit to borrowers. And bailouts to banks without banking reform is a bad idea (and I see the Geithner talk of new measures as window dressing to appease the public in the hopes of eliciting support for the inevitable next round of rescues).

The only way out of a financial crisis is default, whether overt, through writeoffs and restructurings, or covert, through inflation. This process isn’t even seriously underway until we see a lot more renegotiation.

Points 14 -17 on the communique deal with improving regulation and control of many of the markets most responsible for the meltdown of the banking system.    Two sub-points deal specifically with both of those issues.  Stated goals are:

  • to improve over time the quality, quantity, and international consistency of capital in the banking system. Capital requirements should not be strengthened until a significant and sustained economic recovery is assured and the transition managed to ensure that the extension of credit is not constrained. Regulation should limit leverage and require buffers of resources to be built up in good times which banks can draw down when conditions deteriorate;
  • to extend regulation or oversight to all financial markets, instruments, and institutions, including hedge funds, which are individually or collectively of systemic importance, so as to limit the risk to financial stability from gaps in our systems.

The Baseline Scenario considers the actions to date on these important goals a “punt”.

On the real substance, the G20 punts on most of the big issues – as predicted, the language on monetary policy and fiscal policy is completely vacuous (paragraphs 3 and 4; the Europeans won big and the US lost on these issues), and the “regulatory reform” initiative amounts to building more ornate structures (we’re to get a new Financial Stability Board?!?) on the same weak foundations that got us into trouble.  There is simply nothing substantive here that would not have happened without the G20 process; under current dire circumstances, window dressing is not a good reason to hold a summit.

Angela Merkel considers new regulations for financial markets a bigger  priorty.

While turning a deaf ear to Washington’s call for more fiscal stimulus, the EU is pushing hard for concrete results in reforming the global financial architecture. The EU, led by Germany and France, has stressed that financial reform should be the top priority at the London G20 summit, saying it would not only help prevent recurrence of the current financial crisis, but also help rebuild confidence.

German Chancellor Angela Merkel called on Saturday for a “global financial market constitution” to improve regulation of the financial markets.

“We need a global financial market constitution as has not existed before, so that we can finally draw lessons from this disaster,” Merkel said at a political gathering of her Christian Democratic Union.

In an interview with VOA NewsProfessor John Kirton, director of the G20 Research Group at the University of Toronto outlined what he felt were the summit’s most important goals.

“The first thing they have to do is to make sure that the fiscal and monetary stimulus that the G20 countries are injecting into their economies to get growth back, to provide jobs for their citizens, is enough. That it’s working well. That it’s targeted in the areas that will really help the most. Secondly, they’ve got to make sure that the financial system is working by unblocking the credit channels,” he says.

That means comprehensive and up-to-date supervision and regulation of the financial industry. Kirton also warns against a knee-jerk reaction to the global recession.

He says, “They have to make sure that we don’t see an outburst of vicious trade protectionism, which everyone knows punishes all concerned. But [it] is such a temptation for politicians to engage in to appear to be doing something for their voters back home.”

Other challenges include meeting the Millennium Development Goals and modernizing major financial institutions.

“We need to reform the global financial architecture, particularly the World Bank, International Monetary Fund, international institutions that were designed in and for a world of 1944, but really need to be changed for the 21st Century global economy we now have,” he says.

However, although the problems are shared by all at the G20 summit, getting them all to agree still won’t be easy.

“When you have up to 28 leaders from very diverse parts of the world, levels of development, culture, it’s very difficult to get consensus – far more difficult than it is to get in the old G8 club,” he says.

Kirton also says that the current financial crisis is “characterized by a degree of complexity and uncertainty that’s never been seen before.”

“So in some sense, they’re all in this together searching in the dark for a common answer. And I think that is a unifying bond that will pull them together,” he says.

Perhaps the biggest challenge in the meeting for Obama will be to prove that his rock star European summer tour was not just style but is backed up by substance.  Nearly all the leaders and ministers coming to the G20 are old hands at both governing and diplomacy and will be eager to size up the new American administration.  The NY Times outlined personal challenges for POTUS.

President Obama is facing challenges to American power on multiple fronts as he prepares for his first trip overseas since taking office, with the nation’s economic woes emboldening allies and adversaries alike.

Despite his immense popularity around the world, Mr. Obama will confront resentment over American-style capitalism and resistance to his economic prescriptions when he lands in London on Tuesday for the Group of 20 summit meeting of industrial and emerging market nations plus the European Union.

Much of the work will be to overcome the damage to the American name brand inflicted by the Bush administration.  movie-daleks-1lHowever, the Obama administration’s plans-to-date to deal with the global financial crisis are also part of the problem.

Compounding the problem for Mr. Obama is that the route that he has chosen to lead the United States out of the mess — heavy government spending — is not available to many other countries. European governments, for instance, are far more lukewarm about enormous stimulus programs because they already have strong social safety nets, and more fears of inflation, than does the United States.

So when Mr. Obama meets with other world leaders in London, he will be confronting a philosophical divide, with the United States on the defensive not just on economic issues like trade and financial regulation but also on a variety of national security and diplomatic matters.

This will be a challenging environment for a POTUS who has no dipolomatic experience, very little knowledge of foreign affairs, and trade.  He will rely heavily on the entourage that will accompany him which will include SOS Clinton and TS Geithner.  We can only hope for the best.