Page last updated at 18:31 GMT, Saturday, 14 March 2009

Small steps on the road to recovery

Analysis
By Steve Schifferes
BBC economics reporter, G20 summit, West Sussex

Recession remedies: The ministers and central bankers face a huge task

Seeing G20 ministers and central bankers roaming the corridors of the posh South Lodge Hotel in West Sussex was a surreal experience.

Together with their minders and the scrum of journalists, they were often getting caught in cul-de-sacs and having to retrace their steps.

There is something of the same character in the halting steps that are being taken to construct a new financial world order on the back of the biggest financial crisis since the Great Depression.

There are many twists and turns, and it is often hard to see a clear path among the variety of views.

But there is an impression that despite the lack of concrete goals, something is changing, at least in the mood of world leaders if not yet in the markets.

Mood music

The latest meeting of G20 finance ministers made few concrete announcements about progress towards a new world financial order.

The active presence of the new US administration is one of the big changes since the first summit of G20 leaders in Washington last November

But in many ways the meeting was never about substance, more about restoring confidence to the world financial system.

And in that regard, as mood music it may have succeeded, at least in keeping momentum going for G20 summit in April.

The UK Chancellor, Alistair Darling, attempted to maintain the upbeat tone, referring several times to the fact that markets could have confidence that countries will do whatever it takes, for as long as it takes, to tackle the global slowdown.

And he also argued that there was a general agreement that fixing the banking system was now a global priority.

US change

Confidence was also boosted by the aggressive stance of the new US Treasury Secretary, Tim Geithner, who claimed that there was now global support for fiscal expansion "on a scale commensurate with the severity of the problem".

US Treasury secretary Tim Geithner
The US has changed its position under the new administration

Mr Geithner added that he was glad for support for the US plan to expand the funds available to the International Monetary Fund (IMF) to help emerging countries who are now getting into difficulties.

The active presence of the new US administration, committed both to a big fiscal expansion, and to major reform of the regulation of the financial markets, is one of the big changes since the first summit of G20 leaders in Washington last November.

It also makes it more likely that reform will succeed - the US was in the past the main obstacle.

In fact, the US Treasury Secretary went further and admitted that it was the "systematic failure of regulation" that led to the crisis.

Super regulator

One further sign of the changed circumstances was the acceptance by the Swiss government on Friday that it would provide information to tax authorities in other countries, ending centuries of banking privacy.

Alistair Darling
Mr Darling maintained an upbeat tone about the meeting

However, building a consensus on regulation is a long-term aim. It is still not clear which body will emerge as the super regulator for the new system, with the US backing the Financial Stability Forum - now expanded to include G20 countries - while the UK is looking more to the IMF.

Another new element to the G20 discussions in April is that now, every country in the world is feeling the effects of the global slowdown, with the IMF predicting that world growth will be negative for the first time since World War II.

While this has helped create the current consensus, it has also meant that more resources will be needed, not just in fiscal stimulus plans by the big countries, but also in dramatically increasing the resources of the IMF.

The earlier hope that the emerging market countries will lift the world out of recession is long gone.

Now the issue is how much help some of them might require from the IMF to prevent their economies and currencies going into freefall.

And this is one of the other surprising things about the G20's new agreement - the renewed faith that finance ministers are now putting in the IMF, which a few years ago seemed to running out of resources and searching for a role.

Now a global deal to increase the resources of the IMF - perhaps tripling them to $750bn (£537bn) - could be the centrepiece of the global deal at the G20 summit.

IMF reform

The finance ministers also made remarkably specific commitments to reform the IMF and World Bank, giving more weight and voting power to newer economic powers like China and India, and changing the informal agreement that has meant that the US and Europe always provide the leaders of the two institutions.

South Lodge Hotel
It was easy for the ministers to get lost at the hotel

In this they were pushed by the Bric countries (Brazil, Russia, India, and China), who issued their own communique which urged speeding up reform, and hinted that this would be necessary if they were to give further funding.

It was hardly surprising that the new global architecture is still some way off.

And fiscal policy decisions are still likely to be taken at the level of national governments, as the UK itself made clear when the chancellor was asked about his own budget decisions next month.

But there has been a shift in perceptions - which is at least the precondition for greater global collaboration.



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