As the self-appointed economic guardians of the world and thousands of protesters converge on Pittsburgh for the third summit of the Group of 20 (G20), expectations are low that a breakthrough will take place in the form of a coordinated action to address the global economic crisis.
French President Nicolas Sarkozy has threatened to walk out of the summit if leaders do not agree to put a cap on executive pay and bonuses, one of the key causes of the financial implosion. However, consensus on this issue is likely to be more rhetorical than substantial, owing to Washington’s continuing preference for voluntary compliance on the part of bankers. As some observers have pointed out, recourse to voluntary compliance is akin to asking alcoholics to abstain from alcohol.
Financial Regulation: A Mirage?
There will also be agreement in principle over the need for higher reserve requirements on the part of financial institutions, which government leaders hope will curb reckless investment. But the devil is in the details, and here the Europeans want higher reserve requirements than Washington is willing to support. The stated reason for Washington’s hesitation: It doesn’t want to impose rules that might impede the “efficiency” of the financial system. The real reason: The banks continue to constitute a formidable lobby that enjoys the sympathy of U.S. Treasury Secretary Tim Geithner who, as head of the New York Federal Reserve, participated in some of the momentous decisions that led to the 2007-2008 financial debacle.
The stark reality is that over two years after the subprime crisis broke in the summer of 2007, the U.S. government has not issued any new broad financial regulations to curb the propensity of Wall Street’s overleveraged institutions to play with an estimated $600 trillion worth of unregulated derivatives. Indeed, bankers are inventing new speculative instruments, such as derivatives that would allow investors to make money on the sale of life insurance plans by old people who can no longer afford them.
Debate over Stimulus Spending
The summit declaration will probably exhort countries to keep up their stimulus spending to sustain demand and counteract economic contraction. But the reality is that under pressure from fiscal conservatives, the U.S. government has little appetite for more stimulus spending, despite the continuing contraction of the economy. Thus, Federal Reserve Chairman Ben Bernanke and other officials have been hyping the idea that the light is visible at the end of the tunnel and the global recession is likely to end soon, implying that there might be less need now for stimulus spending. As a White House memo to European governments revealed by reporter Greg Palast put it, each nation should be allowed to “unwind” anti-recession efforts “at a pace appropriate to the circumstances of each economy.” This memo was in response to fears in Europe that the United States might turn off the spending tap prematurely, creating problems for Europe and everyone else owing to the centrality of the U.S. economy. Underscoring the difference, a note from a European Union official quoted by Palast asserts: “‘It is essential that the Heads of State and Government, at this summit, continue to implement the economic policy measures they have adopted,’ and not act unilaterally. ‘Exit strategies [must] be implemented in a coordinated manner.’”
Despite these important differences, which could result in divergent policies, the G20 leaders will try to paper over points of disagreement and claim that the meeting is a great success.
Asia’s Dependent Export Economies
The stimulus plans on the part of the United States and the European countries will be of special concern to the Asian participants. Sustained recovery in Asia is a long way off. But some countries have blunted the worst effects of the recession and even grown a bit in the last few months, thanks to aggressive stimulus spending. In China, for instance, the economy grew by 7.9% in the second quarter, a phenomenon driven mainly by the stimulus of $585 billion the government injected into the economy earlier this year. For the export-driven economies of China and other East Asian countries, however, a sustained recovery will depend on the resumption of robust consumer demand in the United States and Europe. But even if Washington continues to prop up the economy with more stimulus dollars, it will be a long while before American consumers, many of whom are now severely in debt, again became the engine of the global economy. In other words, global stagnation will be a long-term phenomenon.
After three summits have produced only broad policy statements of a voluntary nature, the G20 is not a credible policymaking body to address the global economic crisis. There certainly is little in the way of political will to make the hard decisions that will turn around the downturn or mitigate its impact, whether in the form of massive aid to poor countries, bigger amounts and greater coordination of stimulus spending in the major capitalist countries, greater representation in the International Monetary Fund for developing countries, or tighter regulation of reckless financial institutions.
On the other hand, with its lack of legitimacy as an international forum and its image as a club of the rich and powerful — albeit expanded to include China, India, and a number of other large developing countries — the G20 has become a perfect target for protesters, several thousand of whom have been marching against free market economics, for global justice, and for other causes over the last week. Over the next decade, will the G20 serve as the lightning rod for the rebirth of the anti-globalization movement that the WTO performed in the late 1990s?