Outlook Hopes of winning agreement at next week's summit of the G20 for a co-ordinated fiscal stimulus have turned to dust before the meeting could even begin. France and Germany were never in favour of it in the first place, preferring instead to preach the virtues of fiscal discipline and insisting that time must be given first to seeing whether current fiscal stimuli were working before considering even more. Now even our own Prime Minister, Gordon Brown, one of the keenest proponents of global action to deal with the recession, has been forced to concede that he's already so over-borrowed he cannot spend or cut taxes any further. As if Tuesday's warning from the Governor of the Bank of England wasn't salutary enough, the markets sent their own message the following day by shunning an issue of long-dated gilts. There are limits to how much the UK Government will be allowed to borrow.
None of this bodes well for harmony at next week's G20. The US Treasury Secretary, Tim Geithner, has called on other nations to do their bit for recovery by following the US into massive fiscal stimulus. The thinking is obvious enough. If the US acts alone, then everyone else gets a free ride at the American taxpayers' expense. Why should the US be expected constantly to play the role of locomotive for the global economy, pulling everyone else along behind it?
What's more, if only the US is taking the necessary policy action, the global trade and capital imbalances which helped to cause the crisis in the first place will be made that much worse. The "cure" will only succeed in stoking an even worse crisis for the future, with the US sucking in imports from the rest of the world, which then lends America the money with which to buy them. That's plainly no kind of long-term solution.
Worse, it might further encourage an already worrying explosion in protectionism. In order to prevent its own fiscal stimulus being squandered on foreign imports, America might sink back into economic nationalism. That too is not obviously a recipe for international harmony.
But it is not just economic self-interest that prevents agreement. Participation in a global stimulus is limited by ability to borrow. It's all very well the US complaining that others are shirking their duties, but no country can do what the markets won't allow it to. The US's reserve-currency status means it has no difficulty borrowing all it wants. For Britain and other smaller nations with independent currencies, it's more problematic.
All the same, there are lots of ways to skin a cat. Mr Brown asks us to consider the totality of measures, monetary as well as fiscal, in judging whether each nation is pulling its weight. Britain may have no scope left for spending more and taxing less, but it has announced £75bn of quantitative easing. This equates to roughly 5 per cent of GDP, and although officially classed as monetary action, might be seen as a form of stimulus more powerful than much of what can be done fiscally.
Europe seems unkeen on either approach – quantitative easing or fiscal. That leaves the G20 in a quandary. It's possible that nations will be able to agree the broad outline of regulatory reform. This will please Germany, which seems to regard cracking down on hedge funds and other forms of Anglo-Saxon financial speculation as priority number one. Unfortunately, that's the least of our worries right now. For the time being, bankers don't need regulating. Let them wander free. The chastening experience of the last two years has rendered them completely harmless.
To the contrary, the return of a bit of reckless high-risk lending is just what's needed to counter the effects of contracting credit. We had too much of a good thing; now we've got too little of it. The problem banks have is that those judged safe enough to lend to don't on the whole want or need the credit, while those who do need it are barred for fear they will bust the balance sheet. Any amount of policy action has so far proved incapable of shifting this mindset.
Gordon Brown has been touring the world to drum up support for a global response. His motives are as much self-interested as "save-the- world" altruistic, for his political fortunes may depend on this global grandstanding. Unfortunately for him, there is little sign of anyone agreeing on what more can or should be done.Reuse content