G-20 Summit: Assessing the Global Recovery
For Tim Geithner, Ben Bernanke, and the other officials flying to London on Sept. 4, there is room for optimism. An unprecedented volley of monetary and fiscal programs—ranging from slashing interest rates to buying up corporate debt—has pulled the world's economy back from the edge. A rise in leading economic indicators, such as manufacturing confidence and stock market activity, also suggests the worst of the recession may now be behind us.
With economic green shoots beginning to sprout, the London meeting is expected to focus on what policymakers plan to do next. On deck is a further round of financial regulatory reform, including a French-backed proposal to curb bank bonuses, which will feature prominently at the upcoming G-20 meeting in Pittsburgh. And after countries forked out billions of dollars to prop up struggling domestic industries, politicians are starting to wonder when the financial support should be reined in. Economists worry, though, that pulling back before a worldwide recovery has firmly taken hold could wipe out much of the last 12 months' hard work.
"We've come a very long way, but I think we have to be realistic," U.S. Treasury Secretary Geithner told reporters on Sept. 2. "We've still got a long way to go."
Exit Strategy Policymakers' desire to shift from economic triage to an exit strategy for their financial intervention is understandable. Since its March 2009 lows, the S&P 500 index has jumped almost 50%, while European stock markets have risen roughly 30% over the same period. U.S. declines in gross domestic product have bottomed out, France and Germany—the largest economies in the 16-country bloc that uses the euro—reported a slight quarterly GDP gain between April and June 2009, and Chinese officials recently confirmed the country is on track for an 8% growth rate this year.
But before policymakers break out the champagne, many analysts urge caution as the global economy stumbles through the worst downturn in living memory. Jonathan Loynes, chief European economist at London consultancy Capital Economics, says public spending, like the successful cash-for-clunkers schemes, has predominantly driven recent gains. In contrast, the private sector across the Western world is still struggling from the dwindling availability of credit. That's not expected to recover until well into 2010. "It'll be a long time before we get back to where things were before the recession," he says.
Organizing a unified pullback in global stimulus spending also could be like herding cats: difficult at the best of times, almost impossible in the current climate. The recession has hit individual countries in various ways. In response, policymakers have adopted different measures to fit specific circumstances. In the U.S. and Britain, for instance, the financial-services industry's problems have forced politicians to nationalize, or at least reinforce with public funds, struggling institutions. France and Germany—whose banks were less affected—have focused on state aid for failing domestic industries. And in cash-rich China, the government is spending $586 billion to upgrade local infrastructure. "It's not a one-size-fits-all problem," says Gareth Claase, European economist at the Royal Bank of Scotland (RBS) in Edinburgh.
More Stringent Rules One area where policymakers agree on is financial regulatory reform. The excesses of the pre-credit crunch era—opaque trading practices, short-term bonus incentives, and a reliance on credit markets—have drawn criticism from U.S. President Barack Obama to his French counterpart, Nicolas Sarkozy. Already, American and European politicians have pushed through changes. Based on proposals outlined at the London G-20 summit in April 2009, ratings agencies, complex derivatives trading, and alternative investments such as hedge funds and private equity have all come under a more stringent regulatory umbrella. That includes adding independent board members to scrutinize business activity and allowing officials to monitor companies' trading activity.
Now, European politicians want cutbacks on bank bonuses. On Aug. 25, France's Sarkozy announced new restrictions on bonus payments for French traders whose investments go belly-up. Angela Merkel, the German Chancellor, soon backed the move, which will be discussed at both the upcoming London summit and the larger G-20 meeting planned for later this month. And while banks based in New York and London may balk at proposed limits to multimillion-dollar remuneration packages, Graham Bishop, a British regulatory expert, says the winds are firmly behind Sarkozy & Co. "Wall Street isn't the flavor of the month, and there's a lot of political impetus already out there for [bonus caps]," he says.
For sure, U.S. policymakers may be unwilling to go as far as the French. On Sept. 2, Geithner said he was looking forward to "hearing more about their ideas," but declined to voice his opinion on limiting bonuses. With so much to discuss during the two-day London summit, that's not surprising. Until the global economy finally recovers, Geithner and other global policymakers will have many more summits to flesh out the details.