G20 summit: Concentrate, please

On 2 April, the Group of 20 advanced and emerging economies will convene in London for a summit on reforming the global financial system. As the number of days until the summit dwindle, presidents, prime ministers, and finance ministers have been touting the global consensus on issues of macroeconomic policy, financial sector reform and trade. There is no doubt that these 20 countries need to be on the same page if there is any hope of an effective short-term response to the global financial crisis that may not yet have bottomed out. One hopes that all the G20 camaraderie represents a genuine desire to cooperate – but underneath the rhetoric there are still plenty of differences to be ironed out.

As the host of this shindig, Gordon Brown has the opportunity to shape the policy agenda significantly, having proposed something of a “global new deal” consisting of streamlined global financial regulation, further borrowing facilities for economic stimulus packages, an increased role for the IMF and a crackdown on offshore tax havens. Brown is effectively staking his reputation on this lofty set of goals, and has set the bar quite high for such a gamble. With an election a year away, Brown not only has to prove his mettle on the international scene but must also show the British public that he can address their hopes and fears – which may prove a significant distraction.

If there is to be an effective response to the financial crisis, three things need to happen at the G20 summit. For a start, governments need to coordinate fiscal and monetary policy in order to minimise further shocks and lending problems. Secondly, additional funds need to be pledged to the IMF so that it can deal with potential liquidity crises. Finally, it is vital that governments should avoid falling prey to protectionism, which would further exacerbate the slowdown in international trade flows. If these points are agreed upon, we can hope for a shallower and shorter recession. However, there are many other policies being brought to the table that are both irrelevant to the immediate problems in the financial system and detrimental to the progress that could be made.

France and Germany are leading the charge for a tightening of global financial regulation that would affect all market participants, including private equity firms and hedge funds. Their aim is to prevent the circumstances that led to this crisis from occurring again – but promoting such a long-term goal as a first priority, when an immediate response is needed, does nothing to help minimise the recession. German Chancellor Angela Merkel told the French president, Nicolas Sarkozy, that "the issue is not spending even more, but to put in place a regulatory system to prevent the economic catastrophe that the world is experiencing from being repeated.”

For all Mrs Merkel's virtues, she is not a Nobel Prize-winning economist. Nobel laureates Joseph Stiglitz and Paul Krugman have expressed dismay at the stimulus packages being implemented by G20 countries. Krugman has called EU stimuli “disappointing,” adding that the EU is “doing a bit less than half as much as the United States.” Of course, it would be arrogant to assume that a Nobel Prize bestows infallibility – but it is also arrogant for a politician to blatantly contradict two of the most respected economists in the world. Suggesting that regulatory reform is the first and best response to this economic crisis is akin to suggesting a gunshot victim needs a new suit.

The United States and the United Kingdom are agreed on the need for a further, coordinated global stimulus, but key EU players remain adamantly opposed to Keynesian spending policies to the extent that they are needed. This rift between fiscal stimulus and financial regulation could prove to be the downfall of the entire summit. Nobody disputes the fact that regulatory failures are partly to blame for the intensity of the financial crisis; but the creation of an international regulatory regime should be a secondary goal of the summit, or a topic for later discussion.

Gordon Brown has the awkward task of mediating the US-EU policy divergence, looking after his re-election chances and pushing his own policy agenda. The worst possible course of action for Brown to take would be to latch on to the current populist wave of anger directed at the financial system. The popular calls for limiting executive pay, eliminating tax havens and neutering hedge funds may or may not have merit, but it is indisputable that they have little to do with the current risks to the global economy.

In order to make the most out of this opportunity, the premiers and financiers that assemble at next month’s G20 summit must have the clarity of mind to tell the difference between the policies that directly address the current risks and problems of the financial crisis and those that are long-term and beside the point.