London: To spend or regulate their way out of the world recession? That’s the question finance ministers and central bankers from the Group of 20 countries will take up during a two-day gathering starting Friday in Britain.
With Europeans focusing on greater oversight of financial markets and the United States backing bigger stimulus spending, the widening cracks on policy are raising serious doubts about how successful the gathering will be in developing a common agenda for the full G-20 summit of heads of state and government next month.
“The omens are not good,” said CentreForum economist Giles Wilkes of the meeting that will gather governments representing 80% of the global economy. “Even within Europe, there is little sign of a common approach.”
And the Europe-US split is being exacerbated by demands from major developing countries that are part of the group, such as China, India and Brazil, for a bigger say in a reformed world economic order.
US Treasury Secretary Timothy Geithner clearly set out his position this week, saying it was essential for other major countries to commit to substantial and sustained efforts to bolster their economies in the face of a deepening recession.
Geithner did not directly criticize other nations that have been reluctant to enact the kind of expensive stimulus packages the United States has, but his message was clear that American’s allies need to do more.
One thing Geithner and the Europeans do agree on is the need to increase funding to the International Monetary Fund so it can help countries in trouble. The 16 nations that use the euro agreed this week to urge governments to double the IMF’s resources to $500 billion and give it a key role overseeing risks to the global economy.
And Japan is generally supportive of the US call for stimulus, with finance minister Kaoru Yosano saying this week he will stress the importance of nations working together with stimulus packages to maximize their overall effect.
But Geithner’s stimulus urgings may fall on deaf ears in Europe, where many governments are arguing that there is no further need at the present time for additional tax cuts or spending boosts.
But, wary of piling up huge levels of debt, they don’t plan any new stimulus until they see how current plans are working and they might not see results from those until next year, European Union officials said this week.
German Finance Minister Peer Steinbrueck has been the most outspoken, expressing displeasure at US comments that Europe has not done enough to stimulate the economy.
Briefing journalists in London, Treasury chief Alistair Darling supported fiscal stimulus, but also put strong emphasis on the need for greater regulation of markets, including a crackdown on tax havens and increased control over hedge funds.
Similarly, French officials say that stimulus must go hand in hand with improving regulation and find a response for poor or emerging countries hit by the crisis.
Among the major emerging nations, Brazil’s finance minister Guido Mantega said that his country, which wants emerging nations to play a significant role in changing the world financial order, would focus on rebalancing the international flow of capital.
The competing priorities have led many analysts to make comparisons with the Doha round of trade talks at the World Trade Organization discussions that have achieved little as agricultural nations repeatedly blocked attempts to open their borders to farm imports.
Economists also point out that China, with its massive economy, remains a largely unknown quantity in the negotiations. China has pledged to work with the US and other G-20 nations to help stabilize financial markets and overhaul the global financial system, but officials have not offered any specific proposals ahead of the financial ministers meeting this week.
China has so far been reluctant to offer major cash injections to the IMF or other global financial bodies, although it has indicated that any increase in its commitments would require an upgrading of its role.
Darling tried to play down fears of a blocked outcome from the weekend meeting, acknowledging that “complete consensus” could not be reached overnight.
Whether the meeting generates concrete results remains to be seen.