Page last updated at 14:24 GMT, Tuesday, 24 February 2009

G20 offers hope of peaceful recovery

By Rodney Smith
Business reporter, BBC World Service

The impending G20 summit on 2 April could be one of the most important tests of global unity ever, unlike any that have gone before.

Workers rest under containers on a cargo vessel at Tianjin port, China
China fears that protectionism will worsen the global slump
World leaders will gather in London, some of them with fresh ideas, most full of hope that at long last they can all agree on a universal plan for action that will cut a clear path through the multi-layered fog of the global financial crisis and rescue the global economy from possible slump.

Even as they prepare, the biggest problem the G20 will face will be an already growing tendency towards national protection and self-interest, and a split between the virtuous and the damned.

In Europe, the virtuous include Germany and France, which see the cause of the economic collapse firmly rooted in the under-supervised freewheeling capitalism of the United States and its ideological ally, Britain.

As a result, they feel their preferred solutions of greater regulation, tougher treatment of offshore tax havens and tighter controls of the hedge fund business have moral superiority.

These are the proposals the EU will be taking to the summit.

Brown gives ground

Although the hedge fund industry has become an important and lucrative part of Britain's financial services industry, Prime Minister Gordon Brown bowed to the pressure from his European colleagues for a tougher regime for these lightly-regulated, multi-billion-dollar funds in the interests of a united approach to the total problem.

It won't offer a "cheap fix", according to France's forthright President Nicolas Sarkozy. Supporters of the hedge funds have been swift to point out that the funds were not the cause of the global problem, although they may have been the agents of its advance.

A woman walks past a shop window in Wigan, north-west England
The IMF says the UK will be the worst hit by global recession
A favourite initiative of Mr Brown will be the proposal to make at least $500bn available to the International Monetary Fund.

The British prime minister has indicated his support in the past for a reform of the Fund and the World Bank, whose chiefs will also be attending the summit, that could allow the IMF at least to exercise some sort of supervisory role over the global financial system.

His supporters point to the advantages of having the framework for a future regulator largely in place.

More pressingly, the list of countries likely to be in need of urgent financial help is far from finalised.

Protectionism looms

The challenge now will be for the US and the rest of the world, particularly East Asia, to respond to Europe's approach.

Saudi Arabia
South Africa
South Korea

For US President Barack Obama, the London summit will have to wait until he has presented a budget plan to Congress in line with his pledge to "get exploding deficits under control".

This year's projected $1.2tn deficit will be about 9% of the American economy. That is the highest level since 1945. Some believe it could go higher.

Other delegates at the London summit will be particularly sensitive about the US approach to one of the biggest threats facing the world economy, protectionism.

Already, Mr Obama has steered around this issue in his $530tn stimulus package, but the pressure on his own side is likely to grow.

Europe is not immune either. Mr Sarkozy offered the French motor industry support in return for jobs being brought back to France from its European neighbours, such as the Czech Republic.

East Asian nations are turning to one another for help ahead of the summit. Asian finance ministers propose extending an emergency currency fund from $80bn to $120bn to protect themselves from the financial crisis. Japan, China and South Korea will contribute 80% of the capital to the fund.

Climate change

It is difficult to know how far the international financial system can be regulated. The working system is based on some co-operation and lots of competition. New rules and restrictions suitable in one area may not suit another, may not even be enforceable.

London summiteers are unlikely to escape without some consideration of the other global threat, to the global environment. Solutions to economic problems will be required to complement rather than conflict with the environmental needs of a planet under threat.

Accepted economic principles have been overturned and abandoned with almost careless ease by governments desperate to cope with economic implosion on an almost terrifying scale. The effect is likely to be a different political and economic landscape to the one the world has been developing for several centuries.

In future, governments will control or be able to influence financial markets through ownership of the banking system.

In some countries, governments may become "de facto" landlords for millions of civilians. Civil services will balloon to cope with new responsibilities, as will the requirement to fund them.

This could have a major bearing on future tax and savings rates for billions of people and, in the worst examples, could stunt the innovations and entrepreneurs who generate future growth. Already the British Treasury is recruiting redundant bankers to cope with the workload it sees ahead of it.

Mapping the future

The requirement for greater financial transparency may generate a different kind of protectionist cover by political expediency - by civil services traditionally geared to the national need rather than the efficient working of the marketplace and the profit motive.

If unemployment rises to match some of the more dire forecasts, this and possible attendant social unrest could also influence how governments deal with national need versus international obligation.

These are just some of the issues that will be engaging world leaders and their advisers as they prepare for the London Economic Summit on 2 April.

The talks may seem high-minded and maybe even irrelevant to the person in the street: nothing could be farther from the truth. This summit has to start to lay a creative map for the world ahead.

Past economic collapses have one particularly unfortunate consequence - they often end in conflict, in war. It would be welcome if this time, human beings could crack that model.

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