Talking-shop-on-Thames

BIG ECONOMIC POWERS DECIDE THE FATE OF POOR “LIKE King Charles II, the Economic Conference is taking an unconscionable time to die,” lamented The Economist in 1933, halfway through an epic—and ultimately fruitless—gathering of world powers in London to prevent the spread of protectionism in the depths of the Depression. That conference lasted more than a month, with the dollar sinking and tempers rising the longer it dragged on. At least there is no danger of interminable drift when leaders of the Group of 20 gather in London next month to address the worst economic crisis since the 1930s. They have set themselves just one day, April 2nd, to do what their predecessors failed to accomplish in weeks: tackle the crisis and consider ways to remake the rules of finance. This weekend G20 finance ministers and central bank governors attending a preparatory meeting in London may well attempt to limit expectations. More pressingly, they will have to heal an awkward sense of transatlantic disunity that has emerged in the run-up to the meeting. The tensions were exposed at an assembly of European finance ministers on March 9th and 10th. The ministers responded sharply to a call by Lawrence Summers, the White House economic adviser, for everyone in the G20 to focus on boosting global demand. Such calls were “not to our liking,” sniped Jean-Claude Juncker, Luxembourg’s prime minister and the chairman of the meeting. The cause of harmony may not have been helped when Britain’s most senior civil servant was quoted as saying the shortage of staff in Barack Obama’s two-month-old Treasury was making preparations for the summit “unbelievably difficult”. (Tim Geithner, the treasury secretary, disputes that.) In reality, the tensions appeared more symptomatic of the opening of bargaining than of a disastrous rift. The G20’s agenda focuses on three broad areas: sorting out the crisis through fiscal and monetary means and by encouraging banks to lend; medium-term regulatory reforms; and strengthening multilateral bodies such as the IMF so that they can give more help to crisis-hit developing countries. Everyone has different priorities. America feels its counterparts are not doing enough to boost demand. It would like them to pledge a fiscal stimulus equal to 2% of global GDP this year and next, and for the IMF to monitor compliance. Some countries would also like the European Central Bank to make better use of its monetary arsenal, as the Federal Reserve and the Bank of England have. America has indeed done a lot to stimulate growth (see table). The IMF, however, notes that taking into account automatic stabilisers, such as welfare payments to the unemployed, Germany’s fiscal response is not as far behind America’s as it appears. Not only does Germany feel its spending package is big enough, it is pressing for a quick return to balanced budgets when the crisis is over. Although transatlantic differences have emerged over fiscal policy, they are narrowing over regulation. Germany and France have long battled to persuade America and Britain to regulate hedge funds, which are clustered in the financial centres of New York and London. America is now prepared to countenance regulation of systemically important ones. Since the G20 leaders first met in November, their deputies have laboured on reforms to the stricken global financial system, in particular through the Financial Stability Forum (FSF), a Basel-based group that met in London this week. These include reforms that would affect bank regulators, supervisors and accounting standard-setters, and cover bankers’ pay, derivatives trading and rating agencies. America, chastened by its own regulatory failures, is now more supportive of tougher, co-ordinated global regulatory standards but only to a degree: it is unenthusiastic about uniform standards for executive pay pushed by Britain. In addition, the FSF is expected to propose to the G20 ways to make bank regulation less pro-cyclical, by making forward-looking provisions against bad loans rather than the “incurred-loss” method now in use—though not so that banks can use the provisions to massage earnings (see article). It will suggest incorporating a leverage ratio into bank-capital requirements, to supplement the existing risk-weighting of assets. It is also helping set up cross-border supervisory colleges to share information about 30 global banks. Illustration by S. Kambayashi There is general support for doubling the IMF’s resources to $500 billion, but America would like it to have even more. It is not clear how the increase would be funded. Reserve-rich countries like China could contribute more, as Japan did with a $100 billion pledge in February. But some fear that strings might be attached to such money, such as less criticism of China’s exchange-rate policy. Mr Geithner has proposed the IMF’s credit line with 26 rich member countries be dramatically raised to $500 billion from $50 billion. Some of the trade-offs will be driven by political considerations. French and German voters, for example, lay part of the blame for the crisis on hedge funds and tax havens, even though both played minor roles compared with the highly regulated banking system. Likewise, Mr Geithner is pressing for higher global capital standards for non-bank financial firms (such as American International Group, a big insurer), in part to reassure taxpayers that this sort of crisis and the accompanying bail-outs will not be repeated. Given the importance of the summit to the reputations of Gordon Brown, its British host, and Mr Obama, on his first overseas trip since taking office, every effort will be made to trumpet such progress. Few expect a 1933-style fiasco, though participants believe that given the tensions exhibited this week, a narrowing of differences is more likely than any “grand bargain” to put the world to rights. The best that might emerge from the summit is proof that leaders of the world’s biggest economies continue to talk to each other. Given the urgency of the situation, and the immense capital that Mr Obama still holds abroad, the world might have hoped for more. Talk, like so much else in this financial crisis, is cheap.