G20 Focus: Another battle begins

The G20 nations managed to avert financial armageddon. Now, asks Sean O'Grady, how can they secure economic recovery?
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Just as timing is the secret of successful ... comedy, so it is with global economic management. Precisely when the world economy will be strong enough to withstand the withdrawal of the vast artificial stimulus it has enjoyed over the past year is by far the most crucial question facing world leaders in Pittsburgh this week, whatever headlines may be grabbed by the anti-capitalism protesters. The issue is unlikely to be fully resolved, if only because you can only tell if an economy has properly recovered after the event.

Nor, in anything other than the broadest terms, will the G20 nations say what, precisely, they will do to stop banks and bankers from taking the sorts of excessive risks that helped to land the world in the mess it is in today. Moreover, even for men and women representing 85 per cent of global GDP, the money for propping up the global economy may run out eventually, a spectre at the grand feasts awaiting them in Pennsylvania.

Still, for a few days, Barack, Gordon, Angela, Lula and the others will be entitled to feel a little smug. Most of the $5trillion in fiscal stimulus agreed to has been spent and, if stock markets are to be believed, has had some effect. It is not so much a matter of where we are now – still in the worst recession in three-quarters of a century – but where we might have been had they not done what they did. This time last year, the Bank of England's bank rate was still at 5 per cent.

In the post-Lehman Brothers atmosphere leading up to the G20 summit in Washington last November and the first few months of this year, financial apocalypse seemed imminent – and forced action. When Gordon Brown, echoing praise heaped upon him by the Nobel prize winner Paul Krugman, misspoke in the Commons last December and declared that he had "saved the world", he was mocked. Now, however, even his most bitter critics acknowledge that the decisive action taken by the G20 over the past year or so – record low interest rates, record large budget deficits and refinancing of the banks – probably averted a full-blown, 1930s-style recession.

Still, there is that small matter of timing: when to execute those much discussed exit strategies. In their communiqué earlier this month, G20 finance ministers and central bankers "agreed the need for a transparent and credible process for withdrawing our extraordinary fiscal, monetary and financial sector support as recovery becomes firmly secured". But what, when and how "firmly secured" is defined, and who does the defining, is left wide open, where it probably will remain by the end of the summit. Crucially, the G20 finance ministers added: "The scale, timing and sequencing of actions will vary across countries and across the types of policy measures."

Last week, the informal EU conference of heads of government agreed that "fiscal polices must be progressively reoriented towards sustainability. Exit strategies need to be designed now and implemented in a co-ordinated manner as soon as recovery takes hold, taking into account the specific situations of individual countries". Again, this is somewhat open to interpretation.

No government yet feels that its country's individual recovery is strong enough to warrant an immediate withdrawal of support, although the disparate economies of Norway, Australia and Israel are widely thought of as being the first in line to raise interest rates, probably by the end of the year. Nor does any government believe the current stimulus can be provided indefinitely. Smoke and mirrors are at work here. Germany has been vocal in condemning Britain's "crass Keynesianism", yet in fiscal terms has boosted her economy by more. Mr Brown has urged others to carry on spending, but is planning a fiscal contraction from next year as the VAT cut, vehicle scrappage scheme and stamp-duty holiday come to an end, and the new 50p rate of income tax and other higher taxes kick in.

France, Germany and Japan are technically out of recession, having secured positive growth in the second quarter of this year. The UK and the US may be in some form of positive growth now, while China, India and Australia have seen their economic growth accelerate. Yet, as the Governor of the Bank of England, Mervyn King, stressed last week, none of this means conditions are going to return to normal. Germany and Japan may "double dip" next year.

In the UK, US, Ireland, Spain and other places, the sheer scale of personal and public debt is a serious drag on recovery. Having run out of room for manoeuvre, they are hoping other, more prudent nations will continue to expand even as they launch their own exit strategies – hence the arguments. To use an analogy dating back to the 1970s and the earliest meetings of the G5 – the ancestor of the G20 – the world needs "locomotive" economies to pull weaker coaches along. In those days, it was Helmut Schmidt's Germany which was expected to do much of the heavy work; now Angela Merkel finds herself in the driver's cab.

On bank regulation and executive pay, again there is agreement on principles but the detail is still devilish. Last week's EU statement, for example, voiced enthusiasm about "macro-prudential" rules, but was silent about how they could be used to control the credit cycle, the activities of individual banks and bankers (critics doubt that they can do all three).

On the other hand, the EU said much about how big bonuses should be, but little on how the ever-ingenious financial community can be stopped from circumventing new rules. If the EU gets its way, the G20 will agree to "explore ways to limit total variable remuneration in a bank to a certain proportion either of total compensation, or the bank's revenues, and/or profits". The EU wants to see "the threat of sanctions at national level" – few would see the Chinese signing up to that. President Sarkozy has threatened to walk out if he doesn't get his way, just as he did in London in April. Plus ça change...

Tax evasion, the environment and protectionism will take up the rest of the time. Again, don't expect too much but at least acknowledge that the process of engagement – so lacking in the 1930s – may be delivering benefits. Its timing may not always be perfect, but the G20 need not be dismissed as a bad joke. Not yet.