| Author (Corporate) | France: Ministry of Foreign Affairs |
|---|---|
| Publisher | France: Ministry of Foreign Affairs |
| Publication Date | 2011 |
| Content Type | Key Source, Overview |
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Cannes conundrums Whatever Nicolas Sarkozy envisaged dominating his moment at the centre of global economic governance, the question of whether the indebted and embattled Greek government would survive a hastily called confidence vote was probably not it. Despite the French president’s valiant efforts to focus attention on his country’s agenda for the Group of 20 leading nations, of which he is currently chair, this week’s meeting of heads of government in Cannes will be dominated by the failure of a string of mini-summits decisively to bring Europe’s escalating sovereign debt crisis under control. But if the eurozone is the bad news, the worse news is that the global economy still suffers from the same serious imbalances as it did before the financial crisis – and that this year’s political developments are likely to make them harder, not easier, to resolve. “For the second time in three years, the world is on the brink of a global recession,” says Jan Randolph, head of sovereign risk at IHS Global Insight, an economic consultancy. “This time the catalyst is the eurozone debt crisis.” The quality of global and particularly eurozone policymaking at the moment is failing to instil confidence in investors, businesses and households. Last week, a wearyingly familiar pattern repeated itself. A convocation of eurozone leaders made ambitious-sounding promises to build a firewall around Greece by boosting the European financial stability facility bail-out fund; strangely credulous investors produced an initial jump in the euro and in eurozone bond and stock prices. But within days, markets sank again as details remained vague and political will was deemed highly uncertain – then dropped sharply as George Papandreou, Greek prime minister, stunned fellow eurozone leaders by announcing a referendum on the terms of the bail-out. Economists are issuing increasingly pessimistic warnings about the outlook. Indices of activity by purchasing managers, and other forward-looking indicators, suggest the eurozone may be back in recession already. The potential for global fallout has hardened the rhetorical tone from G20 members, particularly the US, with reassuring calm giving way to public alarm. Yet even if the eurozone’s immediate problems can be solved, the world economy remains dependent on consumption by countries such as America, which run chronic fiscal and current account deficits, rather than those with surpluses, among them Germany, Japan and Asian emerging markets. According to a recent report by International Monetary Fund economists: “The dual rebalancing acts needed to secure strong, sustainable and balanced growth – a handover from public to private demand in major advanced economies, and stronger domestic demand growth in external surplus economies – have stalled.” At this stage of a recovery, particularly from such a steep drop into recession, growth would normally rebound sharply as consumer demand picked up and companies scrambled to increase their investment and rebuild stocks after running them down during the contraction. But last week’s brief burst of optimism in the US, when gross domestic product growth numbers for the third quarter were stronger than expected, merely underlines how far expectations have fallen. GDP in real terms expanded at an annualised rate of 2.5 per cent in the three months, nearly double the 1.3 per cent annualised rate in the second quarter, largely driven by a recovery in private consumption. However, that only just took the level of real GDP above its peak 15 months ago before it plunged into recession. The economy at this stage in the previous four US recoveries from recession was 10 per cent above its pre-recession peak. Paul Ashworth at Capital Economics points out that consumption was funded not by robust income growth but by Americans saving less, an echo of the unsustainable credit-fuelled spending binge during the boom of the 2000s. The personal savings rate as a share of disposable income dropped to a four-year low of 3.6 per cent in September. “It is hard to see this faster pace [of consumption] being sustained for that much longer when real personal disposable incomes contracted by 1.7 per cent in the third quarter,” he says. For now households may have halted the process of deleveraging after the huge debt loads they built up but it seems unlikely that they have finished. It is doubtful how long such a recovery in consumption will continue as long as unemployment remains so high and the prospects for income growth weak. The increase in non-farm payrolls, the most closely watched measure of the US jobs market, has slowed this year to a pace of expansion well below the trend growth rate in potential workers entering the market. The headline unemployment rate remains stuck above 9 per cent, and broader measures including those forced to take part-time work have risen much higher. . . . Even this burst of growth is heading for the quicksand next year if, as planned, the US fiscal stimulus is withdrawn. Barack Obama, president, has so far largely failed to convince Congress to pass a plan that would increase government spending and extend temporary tax cuts due to expire next year, with John Boehner, the Republican speaker of the House of Representatives, assiduously blocking such moves. The spectacle of the debate over raising the federal debt limit in August seems likely to be repeated when the next public financing deadline comes up this month. The US continues to urge other countries to keep government spending going, yet on current projections it will impose one of the fastest fiscal tightenings in the G20 over the next year. Mr Obama is essentially in the position of saying: “Do as I say, not what John Boehner makes me do.” The hazards of premature fiscal tightening are evident in the UK, where feeble GDP numbers published this week underlined the gamble taken by David Cameron’s right-of-centre coalition government in cutting public spending before the economy had gained momentum. . . . Meanwhile, emerging markets as a whole are unlikely to fill the gap left by weak consumption in the advanced countries. Despite, for example, the repeated assertions of Chinese leaders that they want to shift to a consumption-driven model, the incentives for the perpetuation of an export- and investment-based economy remain. Beijing continues to hold down the renminbi – the currency has risen less than 4 per cent against the dollar this year despite entreaties from the US for faster appreciation. And the state, at least through provincial governments, continues to shovel cheap money at favoured companies. Whether China’s apparently overheated property market is indeed in a bubble, and whether that bubble will pop in the near future, is the subject of intense and abstruse debate among economists – but there is certainly a non-negligible risk that even the country’s current underpowered contribution to global consumption could be further reduced by such an outcome. Current account imbalances shrank during the worst of the global recession. But that was caused mainly by lower demand in the US and Europe temporarily sucking in fewer imports from China, not by a fundamental rebalancing of consumption. The IMF calculates that Chinese consumption would have to have risen by 17 per cent in 2009 to make up for the shortfall in US demand, with the national savings rate falling by about 10 percentage points. Needless to say, that did not happen, and as the recovery took hold last year, so the imbalances began to open up again. In any case, the emerging markets as a group have such a small share in global consumption, much smaller than their share in overall GDP, that it would have to expand dramatically to offset the effects of slower growth in the advanced economies. The IMF thinks that, if anything, emerging market countries as a whole are likely to contribute a smaller share of global consumption in the years ahead than before the crisis hit. “These economies do not make up for the lower consumption contribution of advanced economies,” the fund concluded. “Although the rebalancing journey may have started, based on announced policies it will likely take a long time to complete.” Washington will continue its long campaign inside the G20 for Beijing to allow a faster appreciation of the renminbi to assist in global rebalancing. But its record of success is undistinguished – as, more generally, is the group’s record of persuading large countries to change their minds on big economic issues. Eswar Prasad at the Brookings Institution, a Washington-based think-tank, says the G20 “has not proven effective at resolving policy conflicts among its members or helping to overcome domestic political gridlock”. At the moment, the moral authority of the US and other rich economies over China is particularly weak. America’s contribution to a big rebalancing would be to consolidate its medium-term fiscal position, helping to reduce the current account deficit. But while Congress is on course sharply to withdraw the fiscal stimulus in the short term, it has yet to come anywhere near agreement on long-term spending and tax plans. The “supercommittee” commissioned by Congress with the unenviable task of identifying expenditure to be cut and/or taxes to be increased will not report until later this month, and the likelihood of it coming out with a plan that rapidly gains bipartisan support is low. Of the other advanced economies, Japan’s resumption of intervention to hold down the yen on Monday makes it supremely badly placed to join any drive against Chinese currency manipulation. The eurozone, too, is unlikely to participate in any aggressive public crusade to float the renminbi in the near term. Klaus Regling, head of the EFSF, is travelling around Beijing and other Asian capitals trying to drum up interest in funding an expansion of the bail-out facility. A decision on whether they will contribute is still awaited, but China will look very dimly indeed on governments that ask for donations while running a voluble campaign against the mainstay of its economic model. Ousmène Mandeng, a former senior IMF official now at Swiss bank UBS, says it has been a bad year for global policy co-ordination in general and the G20 in particular. “Sadly, the G20 missed a great opportunity to remain visible during the crisis this year,” he says. “Failure to address critical issues and to guide market expectations when the going was rough has undoubtedly weakened its relevance.” Additional reporting by Chris Giles Copyright The Financial Times Limited 2011 Hopes for global unity over eurozone dashed Hopes that the rest of the world would use the Group of 20 summit in Cannes to offer additional financial backing to eurozone efforts to prevent contagion spreading from Greece have been dashed. Throughout Thursday night officials tried to agree on support to increase the firepower of the €440bn European financial stability facility or boost the resources of the International Monetary Fund, but eurozone leaders went home empty-handed. The G20 statement said only that finance ministers would again discuss the issues at their next meeting, in February. Putting a brave face on the lack of agreement, a grim-faced Nicolas Sarkozy, French president, said the communiqué mentioned increased funds for the IMF, an enhanced EFSF and use of the IMF’s special drawing rights. The latter, Mr Sarkozy added, was likely to be “the option adopted in February – probably”. Christine Lagarde, IMF managing director, also tried to quell the sense of disappointment, saying she had received an “unlimited” commitment of resources from the G20 with “no cap, no floor and no ceiling on resources”. She said the fund had sufficient resources to cope with systemic shocks until finance ministers met in February. But she also highlighted how difficult it would be to secure agreement, pointing out that many IMF members, including the US as the fund’s largest shareholder, had not yet paid the additional contributions they had signed up to in 2010. “There is a still a long way to go,” she said. “I’d like to see my money.” Some ideas were comprehensively ditched at Cannes. Ms Lagarde made it clear the IMF would not lend money to the EFSF, because the fund “lends money to countries, not to legal entities”. Other ideas – including a plan that countries such as China or Brazil would lend to a new special vehicle, seeded with money from the EFSF – were also played down. Herman van Rompuy, president of the European Council, said it was not surprising that little progress had been made on the special vehicle. “We are only one week after our decisions. Don’t expect that we have a full-fledged scheme here already on the table,” he said. One EU official said the plan was still alive. “There have been discussions of this and I think there is interest. What everybody wants to see is ... now besides the general features, which have been agreed, is how this will be translated in practice. We are going to very swiftly put it into music. It’s a matter of weeks, not a matter of months.” Instead of providing firepower or helping to channel bilateral support, the IMF’s role in helping to resolve the eurozone crisis will be one of policing Italy’s existing commitments to reduce its borrowing and provide more rapid credit to non-European countries caught in the fallout from the eurozone woes. Ms Lagarde said she hoped this role would add credibility to the commitments already made by Rome and that the routine IMF surveillance process would “assess the merits of the measures” Italy has proposed. Copyright The Financial Times Limited 2011. Forum’s high ambitions deliver meagre results Self-styled as “the premier forum for our international economic co-operation”, the Group of 20’s latest summit failed to live up to its central ambition to create “strong, stable and balanced” global economic growth. As they arrived in Cannes, the leaders of countries representing 85 per cent of global output found the agenda dominated by political turmoil in Greece and a eurozone crisis too hot for the G20 to handle. They had little success in making progress on their medium-term goals. The G20 all but admitted that the so-called “Doha round” of trade talks, launched in December 2001, was dead; it produced an action plan for growth and jobs that committed countries to almost nothing they were not already pursuing; and left the international monetary system almost unchanged. Professor Eswar Prasad of Cornell University and a former senior official at the International Monetary Fund said: “Rather than provide new ideas to promote global financial stability, the G20 has offered grandiose but vague promises for the future and a series of short-term fixes that are hostage to political circumstances in individual countries.” The one area in which some progress was made in the official communiqué was on exchange rates, where all the G20 agreed that “exchange rate regimes that are currently relatively inflexible will be made more flexible more swiftly, including China”. But in a sign that China was not committing itself to fundamental change in its currency policies, Hu Jintao, its president, made no mention of exchange rates in his speech to the G20, and declared that “strong growth [in China] is the primary goal in pursuing strong, stable and balanced [global] growth”. China repeated its commitment to slow down its accumulation of foreign exchange reserves, according to the communiqué, something it has said repeatedly since 2006 as its reserves have grown at ever faster rates to a level of $3,000bn. One of the few concrete announcements made was to pull the plug on the Doha global trade negotiations. The round – formally called the “Doha development agenda” – has in effect been in abeyance since the collapse of the last ministerial meeting in 2008, despite attempts by the G20 and politicians such as Gordon Brown, former UK prime minister, and David Cameron, his successor, to claim the talks were making progress. “We stand by the Doha development agenda mandate,” the communiqué said. “However, it is clear that we will not complete the DDA if we continue to conduct negotiations as we have in the past.” The G20 leaders called on a ministerial meeting, which is due to be held next month in Geneva, to discuss “fresh, credible approaches to furthering negotiations” that could include parts of the Doha round if feasible. Dan Price of the Rock Creek Global Advisors consultancy, a trade lawyer and formerly George W. Bush’s White House representative at the G20, said: “For the first time, leaders recognised that the Doha negotiations will not succeed on the basis of the current negotiations.” The G20 “recognised that it is unlikely to produce an adequate outcome”, he added. Although ministers are likely to be able to announce Russia’s accession to the WTO at next month’s meeting, attempts to agree separate parts of the Doha round including a deal for the poorest countries have already stalled on fresh disagreements between the big trading powers. Nicolas Sarkozy, French president, hailed elements of the “action plan for growth and jobs” as an “excellent thing”. It described the steps Europe is taking to defuse the eurozone crisis and outlined existing economic policies of other countries. Some nations with sound public finances – Australia, Brazil, Canada, China, Germany, Korea and Indonesia – committed to “additional measures to support domestic demand if the economic situation worsens”. In the medium term the G20 said “surplus countries will take measures to support domestic demand” and all countries signed up to “structural reforms needed to enhance potential growth and jobs”. The same countries have made similar pledges for the past five years since the IMF set up what was then known as “the multilateral consultation on global imbalances”. With so many promises and such meagre results, Prof Prasad said the G20 was increasingly irrelevant. “We are left with a tumultuous world economy at the brink of disaster or at least prolonged stagnation and vulnerability,” he said. Copyright The Financial Times Limited 2011. |
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| Source Link | http://www.g20-g8.com/g8-g20/g20/english/home.9.html |
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| Countries / Regions | Europe, France |
