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Challenge before G20

October 29, 2011

THE last time Cannes was in the public spotlight was back in May when the movers and shakers from world cinema were in town for the annual film festival and Robert de Niro headed the jury for the Palme d’Or.

Soon it will be Nicolas Sarkozy in the director’s chair as the leaders from the G20 group of developed and developing nations gather to discuss the poor state of the world economy.

No question, this is the most significant international gathering since the London G20 summit in April 2009, but with one key difference. Then, although few realised it, the world had started to clamber out of the deep pit into which it had dropped after the collapse of Lehman Brothers. Now the fear is that there is about to be a sequel to that horror movie, Nightmare on Growth Street II.

The plot was not supposed to end this way. In late 2008 and early 2009, central banks and finance ministries acted in concert as credit dried up, factories were mothballed and ships lay idle in ports. They slashed interest rates, pumped money into weak banks, reduced taxes, raised spending and created new money. Befitting the most serious threat to jobs and prosperity since the 1930s, the G20 came up with a full, 70mm, blockbuster response.

The outcome, though, has been disappointing. The recovery started well, but petered out as it became clear that the banks’ difficulties ran deeper than feared and the problem of overindebtedness at the root of the financial crisis had not really been solved. Rather large chunks of the debt had been shifted, through government spending and borrowing, from the private sector to the public sector. By early 2011, the inescapable reality confronting G20 leaders was that the biggest stimulus package in history had bought them the weakest economic recovery since the second world war. They expected Steven Spielberg; they got Ingmar Bergman.

Things could be worse. An impasse at Wednesday’s eurozone summit would have prompted an avalanche of selling in the markets and, by increasing the risk of a break up of the single currency, made a second Great Depression a very real risk. The package of measures agreed should help to paper over the cracks in monetary union, providing some hope that the rest of the world — if not Europe itself — will be spared a double-dip recession. Armageddon has been averted, for now at least. Even so, there will be a full agenda for G20 leaders in their two days of talks: Europe, exchange rates, commodity prices, the responsibility on countries running trade surpluses to help those going through austerity programmes, new forms of innovative finance to fund development and what to do about the world’s 200 million unemployed.

Gerard Lyons, the chief economist at Standard Chartered, says the state of the world economy can be compared to the Clint Eastwood film The Good, the Bad and the Ugly. The big emerging economies are the good, the US is the bad, and Europe, predictably, is the ugly.

The quickening pace of globalisation over the past two decades has meant that it is no longer possible for a country or region to decouple itself from what is going on elsewhere.

Hence China may be sympathetic when Europe asks for a contribution to its bailout fund. – The Guardian, London