G20 summit: Will it find a cure for the global recession?

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Chris Cermak and Andrew McCathie | 27 Mar, 2009
The world's big economic powers will hold an emergency summit in London next week amid a deepening sense of despair about the outlook for the world economy and with few signs that major nations have laid aside differences on how to combat the global recession.

While the Group of 20 (G20) meeting of the most advanced and emerging economies will mark US President Barack Obama's first major foray onto the world stage, tensions have emerged notably between Washington and Europe over the need for another round of fiscal stimulus packages to spur world growth.Washington

As a result, the world leaders gathering in London's vast new trade centre on the banks of the River Thames for the G20 summit will be facing pressure to draw up a tenable and coordinated strategy to drag the global economy out of its biggest downturn since the Second World War and to head off moves to protectionism.

The World Bank last week said 17 of the countries that make up the G20 have adopted some form of trade restricting measures as many governments look to prop up their own struggling industries.

All this has raised doubts about whether the G20 summit will be able to sign off on a concrete set of proposals for delivering what the meeting's host British Prime Minister Gordon Brown has called a "global new deal".

In addition to the US and Britain, the G20 summit will include the leaders of Canada, France, Germany, Australia, Indonesia, China, Argentina, South Korea, Saudi Arabia, Turkey, India, Brazil, Japan, Italy, Russia, South Africa and Mexico.

Despite broad agreement on moves to tighten world financial regulation and boost funding for key international institutions, European opposition to additional fiscal packages will make it hard for the summit to propose additional public spending to spur growth.

"They will find a global solution to the regulatory system, but I am more sceptical about agreement on further stimulus measures," said ING economist Carsten Brzeski.

This means London could prove to be the first major test of Obama's diplomatic skills. His administration released a series of plans on long-term regulation and minimising the effects of the financial collapse in the run-up to the G20. Obama has pushed for equally "aggressive" actions from other states.

From a slew of disastrous economic data to more anecdotal evidence of collapsing order books, cutbacks in lavish Indian weddings through to mass layoffs of miners in Africa as commodity demand slumps, all indications are that the global downturn is far from over.

The financial crisis at the heart of the downturn also shows precious little sign of stabilising.

Credit markets are still largely frozen, major banks are still in danger of bankruptcy and developing countries are still reeling from an exodus of private investors. Despite a rally over the last week, global stock markets remain in the doldrums.

The International Monetary Fund (IMF) last week forecast the global economy would shrink as much as 1 percent this year - the first worldwide contraction in 60 years - and warned of an even "deeper and prolonged" recession if governments cannot find a way to stabilise the financial system.

"Before we redesign the firehouse, we need to extinguish the fire," writes Stewart Patrick, a senior fellow at the Washington-based Council on Foreign Relations. "Success in London will require credible commitments to restore the global economy and to stabilise world financial markets."

Also underscoring the sense of urgency facing the leaders as they gather in London is the risk that some national economies could lose the battle to stay afloat as the recession tightens its grip, forcing richer nations or leading international institutions to launch costly rescue plans to bail them out.

That danger has sparked one of the few points of agreement among G20 powers: More money for the IMF, which serves as an emergency lender for countries facing budget shortfalls.

On top of the wider economic threats, the G20 leaders will be meeting amid a groundswell of public anger over greedy Wall Street banks, which sparked the crisis thanks to risky investments in the US housing market but whose survival is also critical to pulling the world's economy back from the brink.

Next week's summit will be only the second time that the G20 leaders, which together represent about 85 percent of the world's economic activity, have met in the bloc's decade-long history.

The first summit in Washington in November came against the backdrop of a global financial shock triggered by a dramatic meltdown in the US mortgage market, with the G20 leaders laying out the broad strokes of a stricter financial regulatory regime.

As was the case in Washington, the April 2 gathering in London will also underscore the growing economic and political clout of the world's leading emerging economies - like China and Brazil - and the consequent shift in the balance of economic power away from the world's top industrial states.

But after a long run of prodigious growth, China's economy appears to be faltering as key exports markets dry up, consequently forcing millions of rural workers to return from the city to a tougher and less prosperous life in the countryside.

Yet the real threat looming over the G20 leaders is that without urgent action, the financial and economic crisis could transform into a jobs crisis as workers around the world are laid off in the face of plummeting economic demand.

Consequentially, with the global economic gloom deepening since November, much of the focus in London now looks set to being on the same short-term measures that dominated the Washington summit six months ago.