G 20/ Global finance still stands on imaginary foundations
The world economy is on the brink, not unlike in November 2008 when the G20 first met in Washington. Then it was the financial meltdown triggered by the implosion of the sub-prime mortgage scheme and the collapse of Lehman Brothers. Now it is a sovereign debt crisis and the spectre of stagnation in advanced economies.
Meeting in Seoul last week, the leaders of the group of 20 largest economies defused the immediate threat of currency and trade wars but failed to create the conditions for a sustained recovery. By agreeing in principle to curb "persistently large imbalances" in trade, saving and spending without taking concrete action until next year, the G20 has done little to avert another global crisis.
What has changed is that cooperative globalism is superseded by economic nationalism. In 2008, the G20 agreed on unprecedented monetary and fiscal expansion to prevent the recession from turning into a depression. In 2010, the group is deeply divided over public spending, financial reform, exchange rates and trade. The disappointing compromise of the Seoul summit will do nothing to reverse the sharp slowdown in US and European growth that increases the global imbalances between deficit countries like the US and surplus countries like China.
The core disagreement left unresolved by the G20 meeting is about how to reduce those global imbalances. Last month the US treasury secretary Tim Geithner floated the idea of capping trade surpluses and deficits at 4 per cent of national output. The Chinese deputy foreign minister Cui Tiankai immediately dismissed the proposal, saying that it harkened back to "the days of planned economies".
When communist China defends the free market against capitalist America, you know that the global balance of geo-economic and geo-political power has decisively shifted.