Monday, 30 March 2009

Not Bretton Woods but not London 1933 either

In 1933 the world failed to come to agreement- split over repayment of war debt, competitive devaluation and the rising the tide of protectionism- and so it continued its meander towards catastrophe. The new administration of Franklin D Roosevelt was largely uninterested in the international dimension of its domestic economic difficulties. From a yacht in New England, Roosevelt effectively torpedoed any deal. So these summits can go very wrong indeed.

They can also go very right. At Bretton Woods in 1944 a system of pegged exchange rates was created, as was the IMF, the International Bank for Reconstruction and Development (now incorporated into the World Bank), but the new international system had more flexibility and security. It catalysed- along with post war reconstruction- thirty years of prosperity for liberal democratic nations. It allowed a massive expansion of trade, investment, and the creation of the European welfare states that we have grown used to. From London 1933 to Bretton Woods in 1944 there is a wide gulf of success.

London 2009 will lie somewhere in between. There will be a meaningful deal and actually that is exceedingly important: beefing up the IMF, greater emergency support for emerging economies who are civilian casualties in this financial war, the beginnings of a new system of international regulation that will manage risk in global capital markets better, and moves towards better exchange of information so we can have a better picture of what individuals and corporations are doing in tax havens. This will all underpin a better system of international regulation.

The notion that this conference is superfluous or superficial just does not stack up. These elements constitute a substantive deal. The G20 standing united and taking substantive measures on top of what has been agreed already is an immediate confidence boost. It is also the beginnings of a new system of international financial regulation which will be a public good going forward. So the nay-sayers are faintly ridiculous. What are they suggesting? That this Summit shouldn't happen? They are not on this planet I'm afraid- perhaps their minds are stuck in 1933.

There is another group who are intent on undermining the Summit before it has even started and they mainly inhabit the media. That is those who focus on disagreement rather the more significant elements of agreement between the G20 leaders. The main focus for this is whether there is to be a new round of fiscal stimulus determined on Thursday.

Though it's a key point let's put aside the fact that each country has their own budgetary processes and that is not timetabled or dependent on international summitry. More importantly, there has already been significant fiscal stimulus by many. Germany springs to mind and so to say that it is against fiscal stimulus is just not true. In the final communique there will be some recognition of the need to re-visit this and the issue will remain on the table for further discussion down the line.

In advance of the meeting of Ministers and Central Bank Governors on March 13th-14th, the IMF produced a very clear paper outlining all these issues. It shows that Germany is committed to a discretionary fiscal stimulus of 1.5% of GDP this year and 2.0% next. The UK is committed to 1.4% this year and -0.1% next (that will change.) The US is committed to 2.0% this year and 1.8% next. So in 2009 and 2010 we are not talking about a huge difference though the US is committed to a slightly higher degree of fiscal stimulus- it has just passed its stimulus bill. So the disagreement is about whether to announce a further stimulus now or wait to see how the already announced stimulus filters through.

The IMF calls for a 2% discretionary fiscal stimulus on average in 2009 and, especially, 2010. Well, Germany hits this target in 2010. Interestingly, the US doesn't and the UK will have to increase its discretionary spend significantly.

So this supposed row between the US and the EU over this issue amounts to very little indeed. There is broad agreement over the need for fiscal stimulus and the minor points of disagreement are over timing. That won't stop the 'Brown defeated' on fiscal stimulus articles appearing as they are doing already.

Which leads nicely into a very quick discussion about the domestic political fall-out from this. Mervyn King argued before the Treasury Select Committee last week that the UK is not in the fiscal position where we could say ‘Well, Why don’t we just engage in another significant round of fiscal expansion?’ Only Mr King will know what he meant by 'significant.' However, it is not at all clear that the UK's fiscal position, declining rapidly though it may be as a result of the fall-out from financial collapse, is worse than other comparable nations. In fact, it's significantly better.

Germany, France, United States, Italy, and Japan all started off in worse positions than the UK and will end up in worse positions. The downside risks for the UK are greater as a nation that plays host to a large global financial sector. We get the significant benefits from that in the good times but bear the brunt of the cost in the bad times. But this argument that somehow Britain is in a worse position than other comparable nations and we 'didn't fix the roof when the sun was shining' or 'didn't repair the hull before we entered the squall' just doesn't stack up at all.

So this week will be intriguing and critical though not history making for either the right or wrong reasons. It will neither be a catastrophic missed opportunity nor the moment that 30 years of prosperity was ushered in. It will be a constructive moment and, whether it's recognised domestically or not, a moment of personal achievement for the Prime Minister for which he will deserve enormous credit. He might have to wait for history for that. And that would be a pity.

**I will be attending the G20 Summit as a G20 Voice blogger and this blog will be devoted almost exclusively to G20 matters this week. I have briefings from NGOs etc that I will draw attention to. Should you wish, as an NGO, trade union, or other to have your say then please email me: anthonypainter AT yahoo.co.uk and I will try to mention your perspective on this blog. I'm of course on Facebook, Twitter, and all that malarkey as well so link to me for blog update notifications. Should be a good week....

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