Page last updated at 17:30 GMT, Friday, 27 February 2009

G20 heads for the last-chance saloon

By Hugh Pym
Chief economics correspondent, BBC News

Global solutions for a global crisis. We will hear a lot more of that call to arms in the weeks leading up to the G20 summit.

Man at a job centre in Pasadena, California
Economic contraction is pushing up jobless totals everywhere
It is a common refrain from businesses and financiers facing the chill winds of recession.

Their message to world leaders is: if you are serious about dealing with the gravest global economic crisis in decades, only co-ordinated policy action will work.

In a globalised financial and trading system, nothing less will suffice. Individual initiatives at individual economy level seem likely to fail to deliver desired outcomes.

Nobody slogging through the foothills of planning for this gathering in London will need reminding about the scale of the economic challenge.

The leading think tanks, the OECD and the IMF, have predicted that 2009 will see recessions in all leading economies. That has not happened since World War II.

Predictions for global economic growth as a whole are anaemic at best. There is every possibility that the world economy will see contraction this year.

Trade slump

Growth figures for the final quarter of 2008 have shocked even battle-hardened economists. Export giants Germany and Japan saw dramatic slumps in economic output, 2.1% and 3.3% respectively.

Japan's exports were more than 45% lower in January than a year earlier, a painful demonstration of the astonishing downturn in world trade.

So what can be done? Co-ordinated fiscal policy will be high on the G20 agenda. So far, there have been varying levels of government action.

In particular, there have been conflicting opinions on the effectiveness of borrowing to spend in a recession.

Crushed car in Berlin advertising Germany's trade-in incentive scheme
Germans can get paid for trading in their old cars and buying new ones
Germany initially held back, cautious about abandoning budgetary prudence.

The country's finance minister criticised the British government for racking up borrowing to fund budgetary measures, including the cut in VAT.

The French president also took a swipe at the UK initiative.

But fiscal stimulus is now all the rage.

Germany has unveiled a 50bn-euro (44bn) package. This includes cash bonuses for drivers who hand over their older, rusting vehicles before buying new cars.

The French measures, including investment in rail infrastructure, add up to about 23bn. Alistair Darling's announcements last November totalled some 20bn.

The US, of course, led the way, first with President Bush's tax handouts last year and then with President Obama's recently-announced plans.

Joining forces

Closer integration of policies like these will be a key aim of the London summit. The theory is that the measures work better if delivered simultaneously and "front-loaded".

G20 MEMBERS
Argentina
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
Mexico
Russia
Saudi Arabia
South Africa
South Korea
Turkey
UK
US
EU
If one country acts to boost its domestic consumption, this may simply increase imports if major trading partners have not introduced similar policies.

Acting together and on a significant scale could give a useful shot in the arm to flagging economies. There will be a lot of talk about securing jobs and promoting growth.

It's a big ask for the summiteers. Their gathering will last a matter of hours rather days. There is a danger of disappointment if the rhetoric on co-ordinated growth policies looks too woolly.

Markets will need convincing that allowing government deficits to swell to pay for these policies is affordable. Someone will have to buy the debt.

Above all, the world leaders in London will have to persuade audiences around the globe that they are sincere about co-ordinated action. Hints of rifts or nascent protectionism will dent the impact of the meeting.

There is a whiff of last-chance saloon here. Building up expectations of the G20 summit runs the risk of disillusion if the outcome fails to match expectations.

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