Can G-20 leaders rise again to avert a second recession?
By S. Sethuraman
Leaders of world’s major economies – G-20 – at their Sixth Summit in Cannes, France, on November 3-4, face the grim challenge of forging another co-ordinated response, as in 2009, to lift the threat of a second recession, strengthen global recovery for growth and jobs, and restore stability in a fragile global financial system.
As before in the wake of the Lehman Brothers’ collapse in 2008, the crisis is centred in the advanced economies with their deficits and debts, mainly the United States and Europe, hitherto the prime drivers of the world economy. The major risk posing dangers for both advanced and emerging economies has been the sovereign debt crisis in the 17-nation euro-zone which had rocked the world’s integrated financial and capital markets for months.
EU leaders, who struggled for long to fix problems after Greece was driven to fiscal austerity, were pushed by the Obama Administration, along with IMF, to come up with a comprehensive strategy to prevent contagion and global slump. With the Cannes Summit too close, the EU leaders announced on October 27 a “comprehensive framework” providing for a 50 per cent reduction in nominal debt of Greece to reduce it to 120 per cent of GDP by 2020.
Two other components of the EU deal includes recapitalization of banks across Europe and building of a strong “firewall” by increasing the existing European Financial Stability (FSF) from 600 billion dollars to 1.4 trillion dollars. This, it is hoped, would help to take care of any future bail outs, with the crisis having spread to Italy and Spain, and assure stability of the single-monetary (euro) zone.
China looms large in EU calculations to beef up their rescue fund facility. EU officials have already sounded Beijing while keeping options open for other surplus countries as well to join in investments in the EFSF. While details of the rescue fund, its operation and the mechanisms for profitable investment are to be finalized shortly, financial analysts are quick to see signs of China taking on the role of a global pivotal financial power, like the United States hitherto.
But China would expect quid pro quo – linking investment to Europe recognizing China as a “market economy”- a status in which it would be spared high tariffs for its cheap goods in EU and anti-dumping measures. This was implicit in a conditional offer of Premier Wen Jiabao in September to help EU ease its financial crisis.
Already spreading investments across the world and acquiring overseas assets in natural resources, using its vast reserves of over three trillion dollars, China has become a dominant global power in output and finance.
China also intends promoting an ASEAN Regional Bank to fund projects and promote development and use its renminbi for its burgeoning trade of some 300 billion dollars with the region.
In sharp contrast, the United States is going through a fragile post-recession recovery with unemployment persisting at 9 per cent. Growth in third quarter (July-September) improved to 2.5 per cent, after about 1 per cent in the first half of 2011, but there are still mixed signals for the last quarter. This is major worry for President Obama whose rating for handling of the economy is too low for comfort, as he campaigns for re-election in 2012.
His 447-billion dollar Jobs Act of September is bottled up in Congress where Republicans, focused solely on spending cuts, have resisted any tax increases for the rich. Republicans have so far brushed aside his balanced package to pay for the Jobs Act and raise the total deficit reduction to 4 trillion dollars over a decade. Frustrated in his efforts, Mr. Obama is taking some executive actions such as putting veterans to work, lowering the cost of student loans, and helping distressed home-owners in refinancing mortgages.
It is the political gridlock in Washington that led to US credit downgrade by the rating agency, S and P in August. Nevertheless, in the context of G-20 Summit, the President has asserted that as the largest economy, the United States will continue to lead in getting the global economy grow faster .His highest priority, he says, is putting Americans back to work and his Jobs Act would create nearly two million jobs, boost demand and increase US economic growth.
The world economy is still not out of its dangerous phase though the EU has at last come out with its plan to contain the sovereign debt crisis which had heightened fears of recession and put at risk emerging economies, which are propping up the world economy’s growth even at its moderate level. However, the euro-crisis has led to some slowdown even for developing countries which account for nearly half of the world output and one-half of global growth.
The Cannes Summit takes place at a critical juncture, and the UN Secretary-General has called on G-20 leaders to save the world economy from a second recession and promote sustainable development through robust stimulus packages, providing decent jobs for youth. They should help to lay the foundations for a green, healthy and inclusive global economy.
Listing other priorities for the Cannes Summit, President Obama said it should move ahead with financial reforms that could help prevent another financial crisis while citing the “strongest reforms since the Great Depression” under implementation in USA. Banks across G-20 should maintain the capital they need to withstand shocks and there needs to be greater oversight and transparency to avoid excessive risks.
Recalling the collective response of G-20 nations which helped pull the global economy back from the brink of catastrophe in London Summit 2009, President Obama said such leadership is again needed to sustain economic recovery and put people back to work in all countries. He wants the Summit to move ahead in phasing out subsidies for fossil fuels and transition to 21st century clean-energy economies.
There would be focus on infrastructure and finance and good governance in promoting development that helps developing nations rise above poverty. India and other BRIC economies would have a decisive role in financial issues and in pushing further reforms in the international monetary system.(IPA Service)