April 2 (Bloomberg) — Leaders of the most powerful nations meet today amid signs that the world economy is stabilizing after months of freefall.
The Group of 20 summit convenes in London as some reports suggest the pace of decline is easing. U.S. durable-goods orders and home sales rose in February, Chinese urban investment surged 26.5 percent in the first two months of the year, and German investor confidence in March reached its highest level since July 2007. The Standard & Poor’s 500 Index last month rallied the most in seven years. (more…)
April 1 (Bloomberg) — Presidents Barack Obama and Hu Jintao meet for the first time today to discuss a global economic crisis each is trying to combat with policies that may further complicate U.S.-China relations.
As they meet ahead of a gathering in London with other leaders from the Group of 20 advanced and emerging economies, the two presidents are directing a combined $1.4 trillion of stimulus spending. (more…)
BRUSSELS, March 21 (Xinhua) — European Union (EU) leaders concluded their two-day spring summit on Friday with the adoption of a common position for the upcoming Group of 20 (G20) financial summit in London.
The leaders made it clear that the EU will take a different approach to the financial and economic crises instead of following the steps of the United States.
U.S. officials had repeatedly called on the EU countries to step up fiscal stimulus to boost demand as a way out for the current financial crisis. But EU leaders did not yield to this line.
The conclusions of the EU summit called for the strengthening of coordination on fiscal stimulus measures, and the implementation of the existing package. There was no mention of the need to commit more money to stimulate the economy.
Czech Prime Minister Mirek Topolanek, whose country holds the rotating EU presidency, said EU leaders felt that they should not take orders from the United States, and that the EU’s priority is to implement the existing stimulus plan and to observe its effectiveness.
In fact, EU leaders are also facing internal pressure to increase the economic stimulus. But they were adamant.
On the eve of the EU summit, the International Monetary Fund (IMF) released its latest projections, which indicated that the euro zone economy will shrink 3.2 percent this year, a situation far worse than originally estimated.
With the economy sliding into recession, the EU’s employment is rapidly deteriorating, giving increasing pressure to governments. As the EU summit was going on, hundreds of thousands of French workers took to the streets, launching a nationwide strike for a second time this year. On the eve of the summit, EU trade unions also urged the EU to increase investment in order to create more jobs.
But unlike the United States, which seems to be able to borrow endlessly, EU member states are subject to strict fiscal discipline under EU rules. They must suppress deficits to ensure stable and sustainable economic growth.
As deficits are approaching or exceeding the ceiling set up by the EU, national governments find themselves in a very difficult position to give more money as stimulus.
The biggest resistance within the EU was its largest economy –Germany. German Chancellor Angela Merkel warned ahead of the EU summit that the differences across the Atlantic posed a threat to global recovery efforts and that countries should not compete with the sizes of their economic stimulus packages.
Instead of increasing economic incentives, the EU is clearly more interested in strengthening the international financial supervision and reform of the international financial institutions, in order to better guard against a repeat of the financial crisis.
On the eve of the EU summit, Merkel and French President Nicolas Sarkozy wrote a letter to the Czech EU presidency and European Commission President Jose Manuel Barros, emphasizing that the EU common position at the London summit should focus on building a new international financial system. Their position has been taken by all EU leaders.
In a long list of the EU common position, the leaders devoted much space to the strengthening of international financial regulation and reform of international financial institutions.
As a general principle, the EU wants supervision and regulation of all sectors and products that may lead to risks in the financial markets — hedge funds, credit rating agencies, credit derivatives, tax havens, executive pay, corporate capital requirements and accounting standards.
The EU supports reform of the IMF to adapt it to the current global economic pattern. Given the growing weight of emerging economies in the global economy, the EU favors the redistribution of IMF voting rights to give emerging economies more say. The EU leaders also agreed to provide the IMF with 75 billion euros to increase its capacity.
Despite the common position, how far the EU can go in terms of international financial institution reform remains unclear. First of all, a threat comes from the United States. Analysts have pointed out that the United States, by giving emphasis to economic stimulus, was trying to distract the attention of EU on supervision and regulation of international financial institutions.
As the prime source of the financial crisis, the laisser-faire approach of the United States has been under fire. Washington also wants supervision and oversight, but it may not be in complete agreement with the EU as to what extent regulation shall be strengthened.
Secondly, there is doubt about how seriously the EU is considering giving more powers to emerging economies and developing countries in key international financial institutions.
At a G20 finance ministers’ and central bankers’ meeting on March 14, Brazil, Russia, India and China — known as “BRIC” countries — called for immediate measures to expand the four nations’ powers in the IMF. There seemed to be disagreements even within the EU’s big three — Britain, France and Germany. Germany and France now also worry that Britain might be leaning toward the United States at the London summit, thus undermining the common EU position.
A failure by the G20 summit on 2 April to tackle the global recession will lead to an even more prolonged downturn, the International Monetary Fund warned yesterday, as it slashed its forecasts for growth.
The IMF’s latest bulletin warned: “Delays in implementing comprehensive polices to stabilise financial conditions would result in a further intensification of negative feedback… leading to an even longer and deeper recession”. Stimulus packages would also need to be maintained in 2010, the IMF said.
The fund also issued a stark warning that the collapse of some national economies in central and eastern Europe could still trigger another wave of banking failures.
The IMF’s note, prepared for the G20, warns of a sort of domino effect running through the continent via the banking system as problems in nations such as Hungary, Romania, Bulgaria and the Baltic states knock down otherwise relatively healthy advanced economies – including those in Sweden, Austria, Switzerland, Belgium and the Netherlands.
That, in turn, could trigger a further international panic like the one seen on global stock markets last October.
The UK is among those especially exposed to further weakness in property markets, the IMF warned. “Falling home prices and rising defaults in the United States, United Kingdom and parts of the euro area are already exacerbating strains in the financial system,” it said. “Mounting lay-offs would further dampen consumption and residential investment.”
The Bank of England policy of “quantitative easing” is endorsed by the IMF, which is encouraging the G20 countries to adopt “unconventional measures” to unlock “key credit markets”.
Differences on the timing of future stimulus packages have emerged as one of the important obstacles to a stronger international response to the crisis. Despite urging by the US and Britain, the German government and others in the EU have resisted pressure to introduce fresh packages quickly. The IMF suggests all nations implement a fiscal boost of around 2 per cent of GDP, which would create more than 19 million jobs globally.
The “bad-bank” model much talked about in recent months is also strongly endorsed by the IMF, which adds a note of urgency to the debate. “Policymakers must resolve urgently balance-sheet uncertainty by dealing aggressively with distressed assets and recapitalising viable institutions.”
The IMF said that it now expects the world economy to contract for the first time since the Second World War, by between 0.5 and 1 per cent, with the advanced economies leading the charge downward: they will see a slump of around 3 to 3.5 per cent – a “deep recession”. The most shocking figure is the one published for Japan – a slump of 5.8 per cent in 2009, with a further decline of 0.2 per cent in 2010.
A few days ago, the IMF said that the UK would slide by 3.8 per cent this year with a further shrinkage of 0.2 per cent in 2010. The equivalent figures for the US are -2.6 per cent and 0.2 per cent, and for the eurozone -3.2 per cent and 0.1 per cent.
The emerging and developing economies will still grow, however. The IMF concludes that “the prolonged financial crisis has battered global economic activity beyond what was previously anticipated”.
The possibility that the fresh twist to the international crisis could come from eastern and central Europe is made explicitly clear by the fund. Former Communist bloc states such as Romania, Bulgaria, Estonia, Latvia, Lithuania, Hungary and Croatia have relied heavily on flows of private finance to fund their large trade deficits and investment in their fast-growing economies. That finance is now starting to evaporate, with resulting intense pressure on national currencies.
The exposure of Austrian, Swiss and other Western financial instructions to these nations could threaten their own stability, the IMF said. It added: “Emerging economies should prepare, on a contingent basis, plans to address the growing risk of large-scale corporate failures… countries should assess their preparedness for dealing with possible bank runs.”