Smoke and mirrors at G20 meeting

Analysis
By Steve Schifferes
BBC News economics reporter

Finance minsters have been meeting ahead of more formal discussions

The G20 finance ministers have laid the framework for a successful G20 summit in Pittsburgh by agreeing in principle to continue the economic stimulus plans worldwide for as long as necessary, and pushing forward plans to reform the global financial system to prevent another crisis.

But beneath the rhetoric, significant differences remain between the US and the UK on one hand, Europe, and the developing countries led by China.

These differences go beyond the rather superficial row over executive pay, where there is far more agreement than one would have thought possible one year ago.

The finance ministers asked the newly created Financial Stability Board to come up with a set of principles to put to the Pittsburgh summit in three weeks time - and indeed the broad principles have been in place since the last G20 in March.

These include the right of regulators to regulate the overall total bonus payments, and the way compensation is paid.

However, like all agreements on international financial regulation, only the principles will be agreed internationally, and the details will have to be implemented by each country's own financial regulator.

So this leaves scope for the French, for example, to be tougher than the UK when it comes to numerical limits on the size of bonus payments.

Political bonuses

But in truth, although important, and politically popular, excessive compensation was more a symptom than a cause of the financial crisis, as Chancellor Alistair Darling confirmed.

The heart of the problem was poor regulation of risk by the regulators and the banks themselves, leading to excessive risk-taking and excessive profits which were bound to eventually lead to a crash.

In a reversal of the usual way the international financial world works, it is now the (usually free market) Americans who are pushing for an accelerated timetable to put in place new, tough requirements for banks to hold more capital - thus protecting the system against risk.

But they got short shrift from the Europeans in the proposal to bypass the existing system in order reach a deal within 15 months on new standards.

US Treasury Secretary Tim Geithner plaintively told his press conference that there was a danger that new standards would not be agreed before the next boom-and-bust cycle begins, and that it was important to maintain momentum while the crisis was fresh in people's mind.

Economic recovery

Since the crisis started, the US, which has been hit earlier and more deeply by the slowdown, has been urging other countries to join in action to stimulate the world economy, arguing that collective action would be more effective than each country acting on its own.

However, with Germany, Japan and France now pulling out their recession, and China returning to 8% growth, it will be increasingly hard to persuade their governments to continue with the same scale of the stimulus in 2010.

In the long term, as Secretary Geithner acknowledged, as the US starts to consume less and save more, it needs other exporting countries (like Germany and China) to buy more and export less - but reorienting either of these very successful, export-led economies could be a long and complicated process.

The UK is in the worst position of all in this debate, not having the fiscal room to have a very large fiscal stimulus plan of its own, unlike the US, yet very dependent on trade, and therefore the recovery in other countries, for future growth.

Running world economy

The biggest question facing the world economy is how to reshape it to reflect the growing economic power of China and other emerging market countries like Brazil and India.

Here the G20 finance ministers sidestepped the tough questions of how to give more voting power to these countries, which inevitably would mean less votes for Europe in the IMF (for historical reasons, small European countries like Switzerland and the Netherlands are over-represented in relation to the size of their economies).

This is going to be a difficult question, with the April G20 setting a deadline of January 2011 for new proposals.

But cheekily the US (which also has a smaller share of IMF voting that its economy would warrant) has joined forces with China in proposing a major cut in the voting rights of European countries, with the US proposing a 5% cut and China 7%.

The failure of the other rich countries, including Britain, to engage in this question now is not encouraging for those who think that the G20 is the beginning of a process of reforming the way we run the world.

And it shows that as well as cooperation, old rivalries are still present in the new international economic order.