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An expression of resolve

The meeting of finance ministers and central bank governors from the ‘Group of 20’ countries held last week-end, ahead of the April 2 summit called to discuss the global financial and economic crisis, has managed to maintain the facade of unity, which itself is no mean achievement considering the deep divisions that exist on basic issues related as much to approach as to strategy. For instance, while the United States wants the European countries to go for bigg er discretionary tax cuts and step up public spending, Germany and a few others are wary of resorting to that course, particularly boosting public expenditure; they would like the people’s confidence in the financial markets restored first. At the meeting, it was resolved “to take whatever action is necessary until growth is restored,” the implication being that the contentious core issues are best left to be ironed out by the heads of state when they meet for the summit. This of course is not surprising, given the nature of persisting differences. For now, the G-20 countries are adopting a two-track approach — one, offering immediate economic stimulus and repairing the financial system, and the other, strengthening the financial sector regulation in the medium-term.

The G-20 leaders, who have been keen on projecting a united front, could do far better to strive for a consensus on certain key issues. The accent ought to be on coordinating the rescue measures adopted by individual countries. Since the economic downturn has a lot to do with global factors, any action to reverse it has necessarily to be collective. Coordinated approach will enhance the effectiveness of the stimulus packages and it is also imperative for putting the banking system back on its feet. The failures of major institutions witnessed recently in the financial sector have sharply brought out how vulnerable these institutions are to global risks. Regulators of several countries will have to work in tandem to check the contagion. East European countries are realising the need for coordination in dealing with economic crises. For all the advantages coordinated action confers, the fact remains that, given the basic differences in perception among the member countries, securing the political acceptance of domestic constituencies for an agreed approach is not going to be easy. Germany and France have opposed global coordination as suggested by the U.S., and they would rather stress financial regulation as the key item on the agenda for the summit. One can only hope that a reasonable compromise will be reached, paving the way for effective action by all the G-20 countries over the near-term.

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