Leading article: The global economy is not yet out of the woods

The G20 must beware seeking to end support measures too early

Saturday 22 October 2011 22:20

Finance ministers from around the world meet today to lay the groundwork for the latest G20 meeting on the global economy to be held in Pittsburgh later this month. At the last G20 meeting in London in April, disagreements about the policy response to the slump, between the US and the UK on one side and Europeans on the other, were papered over after much diplomatic effort. Finding unity looks like being an equally onerous task this time around.

The economies of Germany and France have registered some modest growth in recent months, while the most recent figures show the US and the UK continuing to shrink (although they are expected to show some growth too later this year). In light of this, Paris and Berlin are said to want the G20 to discuss "exit strategies" for state support for economies. In response, the Chancellor, Alistair Darling, issued a warning through this newspaper yesterday saying that no one should assume that the time for support to be withdrawn has arrived.

There is also disagreement between London, Berlin and Paris on financial regulation, both of banks and their remuneration policies. A soothing statement of unity was released yesterday but there remains division. Mr Darling and his boss, Gordon Brown, have their own narrow political agenda of course. They do not want to yield influence over the direction of the G20 meeting to France and Germany. But there is also much truth in the Chancellor's warning that removing support for the global economy too soon would be misguided. One of the lessons from the slump of the 1930s is that premature fiscal and monetary tightening can kill recoveries.

It is important to note that what we are seeing in the global economy is not a private-sector led bounce back, but a modest uplift in output courtesy of unprecedented fiscal and monetary measures by central banks and governments. While demand remains so weak, such support will continue to be necessary.

It is reasonable for the G20 to discuss exit strategies, as France and Germany are urging. But it would be fatal to assume that the work of governments is done and that it is time for economies to be forced to stand on their own two feet.

On bankers' remuneration and regulation, the robust attitude of most European nations, however, makes more sense than our own Government's more timid stance. While the investment banking arms of several banks are turning a profit, this is in large part because extraordinary help from the authorities has driven down the cost of their capital. This assistance is necessary for the good of the wider economy, but there is no justification for investment banks paying vast bonuses to their staff while they receive this special help, especially while non-financial sectors of the economy are still suffering.

Moreover, France and Germany are right that there needs to be a fundamental shift away from the reckless model of lightly-regulated high finance, which did so much to generate the crisis. And, since flows of capital and bank employees are global, there needs to be global co-ordination to deliver this.

But the most crucial message finance ministers need to heed today – and world leaders later this month – is of the dangers of complacency. There are some welcome signs that the pace of economic decline is slowing, even of a bottoming out to the global downturn. But this recovery, such as it is, is fragile. We are by no means out of the woods yet. The policy response of all G20 nations needs to reflect that sobering reality.

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