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Farewell, G8

by Hans Dembowski
A lot of changes were announced at the global finance summit in Washington, but probably a lot will stay the same. Large emerging-market countries seem to have accepted the role of the International Monetary Fund (IMF), for instance. [ By Hans Dembowski ]

The reign of the group of eight leading industrial nations (G8) as the centre of economic policymaking is obviously over. Europe, North America and Japan can no longer tackle their macro-economic problems without China, India, Brazil and even Saudi Arabia, as a quick look at the list of people US President George W. Bush invited to the summit in Washington in November reveals.

The shift in global economy has long been noted; and relatively informal summit diplomacy has finally taken account of it. This change will spread to the international financial institutions (IFIs) from the IMF to the World Bank and the regional development banks. Reforming these institutions, however, depends on statutory changes that cannot be handled over the weekend. Accordingly, these reforms are listed as items on the comprehensive agenda published at the end of the summit.

A lot of details still need clarification. In future, all countries, products, and players involved in financial markets are to be monitored. An eye will be kept on hedge funds, and new rules will apply for rating agencies. All of these changes are sorely needed, and the lame-duck US president has finally accepted them in light of the global crisis on financial markets that started on Wall Street.

But the tenor of the communiqué released at the end of the summit is promising even beyond new rules for the financial sector. The document condemns protectionism and praises international cooperation. The paper calls for massive state action to put an end to the global economic downturn. Furthermore, the G20 want to ensure that the IFIs have the wherewithal to enable such expansionist policy. Major emerging-market governments have thus implicitly accepted the role of these multilateral agencies. That is certainly not what globalisation skeptics have hoped for.

It is good news that the meeting in Washington did not use the pretext of the global crisis to backtrack on any major commitments already made. The Millennium Development Goals, the Doha Development Round, climate protection – all of this was reiterated with the usual political correctness. The question, however, is whether mantra-like repetitions of old pledges deserve attention at all. It would certainly be a good sign if the governments that took part in this summit would make good on their word and come up with a basic agreement for a fair world trade deal by the end of the year.

The snag, of course, is that the most important politician at the moment did not take part in the summit. Barack Obama has not yet become US president, and he has good reason not to allow his responsibility to blur with Bush’s. Nonetheless, it would have made sense to send a designated US treasury secretary to the summit as an onlooker. After all, the international community is tired of always waiting for the USA. Obama could have shown he understands that frustration.

Ongoing debate in Washington, Berlin and elsewhere about subsidising the automobile industry was another warning sign. There was reason to believe that – despite all claims to the contrary – protectionism lurked behind the argument. After all, emerging nations have become quite competitive in this sector in recent years. Any car-related subsidies can only be acceptable if the funding truly helps make future transport more environmentally friendly without hampering foreign firms on domestic markets.

The financial crisis is by no means over, and the effects are only now beginning to be felt in the real economy. In Washington, there was talk of coordinated international action to bolster global economy, but no binding decisions were made. Germany seemed particularly hesitant, planning to stimulate domestic demand with at most a low double-digit billion-euro figure. That certainly did not compare to China’s plans to spend some $ 500 billion.

In Germany, a common anti-Keynsian argument goes that deficit spending at the national level does little to stimulate growth in an export-driven economy. In late 2008, that rings hollow. What is at stake is not a German dip in the business cycle, but the fate of the world economy.