World leaders meet in Canada today for their back-to-back G8 and G20 summits in fractious mood. The climate of international co-operation that was in evidence at the height of the financial crisis two years ago has largely dissipated. Individual governments now seem to be heading off in their own separate directions.
Several European states are rapidly tightening budgets, despite pleas from Washington for them to slow down for the sake of global demand. The German Chancellor, Angela Merkel, has shown this week that she is not in a listening mood when it comes to deficit reduction. And, of course, our own Chancellor has just announced a severe fiscal squeeze.
Co-ordination on banking reform has broken down too. Canada and Japan are opposed to new levies on banks. And European governments are resisting new rigorous capital requirements. One bright spot on the global economic horizon has been China's agreement to curb its currency manipulation. But a question mark remains over how serious Beijing is about moving away from its existing mercantilist policies. Governments are also reneging on their commitments made at Gleneagles in 2005 to increase their aid budgets to 0.7 per cent of GDP. Italy and Japan have actually cut their development contributions in recent years.
In part, this shift is because governments feel the moment of greatest economic danger has passed. The intense pressure for co-operation has receded. Governments are also responding to domestic pressures. Electorates feel bruised by the recession and are inclined to punish incumbent governments. And powerful domestic lobbies are making their voice heard. Self-interest is pushing itself to the fore.
But for nations to turn their back on economic co-operation at this moment would be folly. Unemployment around the world is still high, and the outlook for global growth is deeply uncertain. No one can be sure what will happen as the fiscal and monetary stimulus put in place by states and central banks in recent years is withdrawn. The hope is that the private sector will rebound and fill the gap. But this is by no means guaranteed. Moreover, there is a significant danger in so many nations relying on an export-led recovery. Someone has to buy those exports. Concerns about a collapse in global demand are not idle.
The risk of another global financial shock is also significant. The eurozone crisis is not over, and banks in Europe have been slow to recognise their losses on private debt. The failure of another large financial institution could easily result in Lehman Brothers-type moment for the global economy, or perhaps worse. This underlines the need for co-ordinated regulatory reform of the financial services. Multinational banks are expert at playing states off against each other. Their lobbying needs to be met with a united front from governments.
There is a common global interest in a managed and sustainable fiscal adjustment by indebted sovereign borrowers. There is a common global interest in a rebalancing of trade and capital flows so that emerging countries do not find themselves lending vast sums to rich nations. And there is a common global interest in bringing the skills of the populations of poor states fully into the international economy. Aid flows are one way to do this; liberalising global trade is another.
What world leaders need somehow to rediscover in Canada this weekend is the sense of common economic and financial interest that briefly prevailed in late 2008 and early 2009. But there is a big job to be done at home too. What leaders need to explain to their truculent domestic populations is that, whether people like it or not, in an open, global economy, we really are all in it together.