March 26, 2009
Gordon Brown, in a whirlwind trip to Brussels and the Americas, is seeking to ensure that there will be broad consensus at the G20++ summit in London next month on, in particular, stimulus packages and new regulation.
There is consensus as to the existence of a global economic and financial crisis, but on little else. Is this surprising? Problems cannot effectively be solved unless they are clearly identified. The breadth and depth of the current crisis is not known. It follows that there is a diversity of views as to solutions.
The freedom of individual governments to act is affected by several factors, including domestic politics, who has to approve plans and the state of the country’s public finances.
At the two ends of the spectrum are the United States and Germany. Washington has been pressing European countries to play a greater role in reviving global demand by doing more to bolster their own faltering economies. Germany prefers to wait for the existing measures to work. This was the view broadly prevailing at last week’s EU summit.
The size of stimulus packages is measured in terms of percentage of GDP. However, it is not always clear as to how much of the package relates to existing spending and over what period the money is to be spent. A further argument is that when comparing the size of different packages, existing expenditure on social services should be taken into account (eg much lower in the US than in the EU).
The composition of the packages understandably vary from country to country, eg social spending increases such as unemployment benefits, infrastructure projects, tax cuts, aid to key industries, research and innovation, boosting public spending.
The shape of the spending packages is controversial in several countries. Republicans argue in the US against the huge deficit and potential for abuse. The Sarkozy plan is criticized in France for being too small. The governor of the Bank of England says that the UK cannot afford to spend and borrow more. The prime minister insists that there is overall agreement that, if necessary, further measures will be taken to create growth.
As to regulation, the only global agreement is that the present regulation is unsatisfactory. There are fundamental differences in approaches to regulation. Thus the US favour minimal legislation but the courts are an important factor in enforcement. Continental European countries regulate more heavily. The UK leans towards the US. China has no hesitation in regulating. And so on.
There is also not yet consensus as to the level of regulation. To what extent should it be global, regional (notably in the EU) and national? These different levels in a globalized economy are a seriously complicating factor. But there is no ‘one size fits all’ remedy.
The priorities are:
· Achievement of consensus on the broad principles of stimulus packages and regulation is essential.
· Maximum coordination between countries is critical.
· Avoidance of protectionism in practice as well as in rhetoric.
· Restoration of confidence in the financial and commercial markets. Because of the important influence of psychology on the markets, public disagreement must be minimised. It was not helpful, for example, that the current EU president, Czech prime minister Mirek Topolánek (himself a lame duck) to voice an vitriolic attack on US policy.
Author : Stanley Crossick