The impact of the G20

The London Summit, it was hoped, would provide the groundwork for a coherent global strategy to deal with the current financial crisis. Amidst reports of the scale of IMF investment we ask whether this was the day the world came together; or did they?

 

British Prime Minister Gordon Brown proclaimed that the world had come together to fight the global recession at the end of the G20 Summit in London on April 2nd 2009. It ended speculation about the potential for some major rifts, particularly given the different positions of France and Germany on the matter of tougher regulation. China took what many are considering to be its rightful place on the world stage too, and any expressed differences of opinion were brushed aside.

Brown said that the world leaders had agreed a plan, that wasn’t just about words but “with a plan for global recovery, reform, and with a clear timetable for its delivery”. He expressed a message of co-operation and unity, declaring that “in this new global age our prosperity is indivisible” and therefore everyone in effect needs to work together. Part of this includes rebuilding confidence in the world’s financial systems. The hope is that the measures he announced, including regulatory reform, would shorten the recession, inspire growth and confidence, and subsequently save jobs.

Apart from pledging to give the IMF $1 trillion in emergency aid, which will be used to help any nation – particularly the developing and emerging countries – that finds itself struggling and in need of support due to global recession, The London Conference (the G20 summit) revealed a polarisation of minds. France and Germany had stood shoulder to shoulder together, demanding tougher regulation and less government spending to push the world out of the crisis. France’s President Nicolas Sarkozy was expected to walk out of the conference if he didn’t get his way, but the consensus was such that this didn’t happen.

The UK and the US walked as one, particularly in the guise of Gordon Brown and President Barack Obama who affirmed their relationship. They had argued for more spending and cautious regulatory reform, fearing that the French and German approach could stifle growth rather than encourage it. “The G20 has revealed the closeness of the relationship between the US and the UK on the broad package”, says Professor Michael Cox of the LSE’s Department of International Relations. After all they have bigger banks, making it harder to regulate them.

China’s position as an emerging political and economic power was also consolidated, and that’s even though Chinese President Hu Jintao came to the table with a potentially divisive proposal to end the US dollar’s dominance as the world’s reserve currency (yet Cox says China holds a significant amount of dollars and underwrites US Treasury bonds). Cox believes this was more President Jintao throwing China’s newly affirmed political and economic weight about, jockeying for position to entice the US to act. He was also critical of the US and its role in causing the crisis. Nevertheless, the Wall Street Journal reports that China has agreed to contribute $40bn to the IMF.

Neither the US nor China wanted the conference to become a point-scoring exercise though, and any differences were said to be minimal. That was not only vital for achieving the eventual outcome of the summit, but it’s also because the two countries are very much reliant on each other. The United States, the UK and many other counties within the EU are amongst the biggest export markets for Chinese companies. They have a significant amount of lost business as a result of the recession, which is blamed on a decline in consumer demand for Chinese products.

Even though the credit crunch began in the US, caused by the collapse in the US sub-prime mortgage market which led to a mountain of toxic debts with global implications, only cohesive action and not a war of words could help to restore confidence and economic growth. “China needs their exports and the Chinese need a strong America and a strong Europe to attain this”, explains Steven Culp, Accenture’s managing director of finance and performance management in financial services. He also stresses that Chinese banks are major players in the financial markets, given their high levels of comparative capitalisation next to their Western counterparts. As a result he believes that Chinese banks are in a healthier position. “So If the external credit agencies are looking after all of the banks, with the same directives this gives more consistency”, he adds before explaining that this should reduce turbulence in the marketplace.

So the show isn’t over yet; it will have all been for nothing if positive steps are not taken now to begin to enact the plan that Gordon Brown spoke about at the end of the summit, and particularly by the time the leaders next meet later this year. In the meantime it’s not quite expected that the agreement will end the recession, but it will have a direct or indirect impact on stimulating trade throughout the world economy while restoring faith in the global financial system.

Direct beneficiaries of the IMF’s emergency fund could be the markets like Mexico and Brazil. With 80 percent of its own exports destined for the US, Mexico is in a similar position to China in terms of its dependence on the United States for economic growth. In fact MarketWatch.com reported on April 2nd that Mexico is planning to apply for a $47bn credit line from the IMF. Speculation about a deal led to the country’s IPC index gaining 1.3 percent, settling at 19,880,37 points.

After the agreement was announced, the major indices across the globe also reacted positively.  The Dow Jones was up by 244.84 points, while the UK’s FTSE 100 reacted almost as positively with an increase of 169.36 points. Although most people’s reaction is similarly positive, only time will tell how successful the agreement will be. It’s not going to deliver short-term results, particularly as there is a lot of hard work ahead us before we see any results and re-discover economic stability.

What is certain is that there is a global united stance, even though some differences of opinion remain. However, this unity has also reaffirmed the relationships of the US and the UK while establishing China as major force and a partner for finding a global solution to the current economic crisis. That can only be good news, considering China’s growing economic and political clout.