For those longing for the halcyon days of the 1990s globalisation boom, this week has provided a blast of nostalgia.
The pugnacious Lawrence Summers – then Bill Clinton’s Treasury secretary, now Barack Obama’s top economic adviser – has been telling the rest of the world how to run its economy. Europeans have been reacting with stiff-backed resentment. The UK is trying precariously to keep a foot in both the Anglosphere and European Union camps. The emerging market countries are worrying that their views are being ignored.
The run-up to the Group of 20 heads of government meeting in London early next month is proceeding apace, prefigured by the meeting of finance ministers that ends today. Tour veterans of the international economics circuit digging out their Asia crisis souvenir T-shirts will find the only thing missing is a fight about the value of the dollar, though that might come.
This time, though, the economic crisis is much bigger and the credibility of the grouping that has appointed itself to combat the turmoil is itself in danger. “They have fuelled the rhetoric of co-ordination but weakened the reality,” says one banker. “The markets are now expecting a lot from the G20 and there is a real risk they could destabilise the situation further if they cannot agree.”
This week’s drama has involved a blunt rebuff from Europe, an American attempt to soothe ruffled feathers wrapped around a giant surprise reform package, and a host country desperate for the party to go well but apparently baffled by not being able to get the main guest on the phone. The tensions have one thing in common: although governments are talking global co-operation, they are being driven by their domestic constituencies.
Those pressures are pushing them in unusual directions. When the US starts using the International Monetary Fund to encourage all governments that can afford it to get out there and spend, the old orthodoxies have gone to the same place as Lehman Brothers.
As Mr Summers appeared in Monday’s Financial Times declaring, “There’s no place that should be reducing its contribution to global demand right now” and “It is really the universal demand agenda”, European countries had no doubt his words were addressed to them. George W. Bush may have gone but parts of Old Europe are acutely sensitive to being lectured about the need for fiscal stimulus by the very country that many of them blame for having started the crisis.
Peer Steinbrück, the German finance minister, reacted the next day with what came across – at least from a distance – as lofty disdain, implying that such a call was not worthy of discussion. “We are not debating any additional measures,” he told reporters.
With the crotchety air of a dowager duchess sending a sub-standard amuse-bouche back to the kitchens, Jean-Claude Juncker, Luxembourg prime minister and chair of the “eurogroup” of finance ministers from the single currency zone, added sniffily: “The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.”
Instead, the Germans said, the G20 summit should concentrate on reining in the financial institutions that got the world into this mess in the first place. In that category they prioritised their long-standing enemies: hedge funds and offshore financial centres.
One finance official characterises this attitude as akin to that of a pugilist in a bar brawl. “You wait until a fight breaks out and then take a swing at the guy you have always wanted to hit,” the official says. “Whether or not he had anything to do with starting the fight is not the point.”
Bashing unregulated financial capitalism in general and hedge funds in particular is sufficiently popular in continental Europe that this call even overcame the habitual froideur between Angela Merkel, Mr Steinbrück’s boss, and Nicolas Sarkozy, the French president. Later in the week, the two of them joined forces to argue that more rules rather than an open cheque book would be the way out of the financial crisis. Asked about the US push for stimulus, Ms Merkel pointedly responded: “This is the reason why we decided to speak with one voice today.”
Both Ms Merkel and Mr Sarkozy are facing fractious electorates concerned about the stability of public finances and the euro. In Ms Merkel’s case, she has until September, when an election is due, to convince her political camp she has not drifted too far to the left.
Yet to many Europeans, the US is also trying to deflect problems from its own domestic woes – notably the risk that American banks are drifting towards zombie status at a time when the appetite on Capitol Hill for more money for Wall Street bail-outs is close to nil. “The Europeans have developed this nice line: ‘The Americans are only asking us for money because they haven’t got the guts to ask Congress for it’,” says one hedge fund manager.
At the centre of this particular storm is the UK. A certain amount of schadenfreude can be detected outside the host country at its difficulties in achieving unity. It was Gordon Brown, prime minister, along with Mr Sarkozy, who insisted on portraying the last G20 summit in Washington in November as something akin to a new Bretton Woods, the 1944 conference that designed the postwar financial order.
At the time, Mr Brown was enjoying an unexpected bounce in the opinion polls from his brief status as saviour of the world after his bank rescue initiative – or at least being ahead of the global curve in his moves to recapitalise Britain’s banks. That popularity has long since dissipated and the domestic pressures on the prime minister to deliver a successful summit became evident when he blew into Washington last week.
Chief among Mr Brown’s tormentors was the semi-hysterical British press, sufficiently obsessed by his relationship with Mr Obama to regard as a “White House snub” the president’s failure to hold a joint press conference in the snow-covered Rose Garden in sub-zero temperatures.
Still, it was in vague terms that the prime minister talked about turning the G20 on April 2 into a global New Deal, a familiar tactic to those who have watched him over the years attach grandiose Rooseveltian labels to minor regulatory or bureaucratic reshuffles.
But this week, Mr Brown was forced to choose whether to break ranks with fellow EU leaders when they declared they had done enough for the moment on fiscal stimulus.
Notably, he appeared to hold to the European consensus, despite tugs in the other direction from UK business leaders balking at the endless talk of remaking the global economic order. Martin Broughton, president of the CBI, Britain’s main business lobby group, and chairman of British Airways, described campaigns against bankers’ bonuses and tax havens as “red herring” issues and urged instead a focus on boosting demand.
On top of that, it was accidentally revealed that Sir Gus O’Donnell, Mr Brown’s top civil servant, had told a conference of fellow bureaucrats that, thanks to the tortuously slow process of staffing up the Obama administration, no one at the US Treasury was picking up the phone. “There is nobody there,” he said. “You cannot believe how difficult it is.”
One of the people there is Tim Geithner, Treasury secretary, who is facing his own domestic popularity problems. Mr Geithner appeared in the guise of the good cop on Wednesday, promising that it was possible to walk (increase fiscal stimulus) and chew gum (reform financial regulation) at the same time, and claiming to have encountered no pushback at all from fellow finance ministers. “It is not what I hear from my conversations with my counterparts,” he said. “I think you are going to find very broad support.”
Along with the emollience came a specific, rather startling, proposal. The IMF, where Mr Geithner himself used to be a senior official, should get $500bn (£359bn, €388bn) more in cash, he said – the money being put up by an array of rich countries but with some of the big emerging markets also being invited to join the club. Even the IMF’s management, which has been doing the rounds of reserves-rich countries such as China, was asking only for an extra $250bn.
Along with the present, though, came a less universally welcomed rider: the IMF should monitor the big economies to ensure that they kept the fiscal taps open. Europe gave a swift thumbs-down to this idea as well, and some of the emerging markets pointed out that they were not really in a position to spend like the US.
The scene has thus been set for the grandmother of all gap-papering exercises that will test even the legendary capabilities of British communiqué drafters to the full. But there should be little doubt, observers say, that the divisions seen on display have already dissipated the G20’s ability to spread confidence. The FT’s discovery that the UK had divided G20 members into “priority” and “tier two” for its public relations effort will also have undermined the spirit of being all in this together.
Along the way, despite the superficial similarities to the late 1990s, some extraordinary reversals have happened. Washington is lecturing the world on the dangers of fiscal prudence. The IMF is begging Asia for money. And Mr Brown is prioritising European unity. These are strange times indeed.
