from Follow the Money

The Financial Times’ proposed agenda for the G-20

March 10, 2009

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In a beautifully written leader -- one marked by a broad historical sweep -- the FT lays out its agenda for the London G-20 agenda.

"Participants [at the London G20] must agree on three points.

First, world demand is in freefall. Stimulus is necessary. The surplus countries with the most leeway to increase domestic spending – Japan and Germany, in particular – are not yet doing enough. They can afford to encourage serious spending and are, in any case, suffering the steepest contractions. In addition, if these habitual exporters were to become serious importers, it would be politically easier to hold back protectionism.

Second, governments must take responsibility for dealing with their financial systems. The toxicity which started in mortgage-backed securities is spreading through the world’s banks as ever more assets go bad in the recession. Politicians must make sure that their banking systems are adequately capitalised and deal with the illiquid securities at the heart of this crisis.

Third, governments must agree to put aside more money for the International Monetary Fund. The recession would enter a new, dreadful chapter if a rash of financial crises broke out across eastern Europe, Asia or South America. The fund’s current funds are clearly inadequate. The idea of a large issuance of SDRs – the IMF’s own reserve asset – is an excellent one. Changes in voting-weights, to raise Asia’s share and lower Europe’s, are also both inevitable and desirable.

What matters is that there is agreement on these three issues so that politicians – even those in weak governments, as in Japan – are given the political cover to do what is necessary. A united front is, therefore, essential. Big questions about the shape of the broad future of the world economy can wait until we are certain that there is a future for globalisation."

I basically agree.

Just think how remarkable the last sentence that I pulled from the FT leader is. The FT has long been among the most global of newspapers in its outlook and coverage. And right now it isn’t certain that "there is a future for globalisation." Harsh, but probably accurate. At least if the FT means the current form of globalization. The current shock is testing a lot key assumptions.

Eastern Europe didn’t globalize so much as Europe-ize, but the capital flows from "core" Europe that many Eastern European economies relied on have now dried up. Being part of "Europe" has not quite been the (financial) shock absorber that many in Europe’s East hoped. Asian economies that were burned by a sharp reversal in capital flows in the 1990s tired to insulate their economies by globalizing in reverse. The uphill flow of capital from Asia to the US (and increasingly Europe) was mean to insulate Asia from a sudden reversal in private capital flows. But it also left many in Asia exposed to a sudden fall in US demand for their products -- and right now such a fall is generating as large a shock to output in emerging Asia as the shift in capital flows produced in the 1990s.

The strategies that various countries will put in place to minimize their exposure to a repeat of the kind of shock the global economy is now experiencing still aren’t clear.

Nor is it clear that the G-20 will be able to agree on the FT’s suggested agenda. Europe doesn’t seem inclined to set out additional stimulus, reaching international agreement that banks should be adequately capitalized is far easier than reaching domestic agreement on how to capitalize troubled banks and I am not yet sure there is agreement to expand the IMF’s resources ...

UPDATE: Martin Wolf has more. He forcefully makes the case that the G-20 needs to focus its current efforts on sustaining global demand. Dr. Wolf must have had a hand in the leader as well ....

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