In a move that sets the American tone for the meeting this weekend in London, President Obama called for coordination of increased stimulus spending by the G-20 members and for increased international cooperation in regulating the world's financial institutions. Most agree that a new world order is needed, but there is not agreement as to what should be emphasized first.
In recent past statements, Mr. Obama had downplayed America's role in working on international bank regulations. His Secretary of the Treasury, Mr. Timothy Geithner, has stated that America would not have a fully fleshed-out regulatory package in time for the London meeting. It is not clear from the statement whether the new statement of the President means that this problem has been overcome. But, it is reassuring that he is not backing away from this important agenda item.
There is not a unanimity among world leaders about the most important items on the G-20 agenda. Angela Merkel, Germany's Chancellor, has not agreed that a major stimulus program is necessary for the Euroland economies. Her current proposal of about $63 billion in stimulus spending is dwarfed by the U.S. efforts of almost $800 billion recently passed by Congress and by China's $500 billion that is already being spent. Japan is more in the German camp, having committed to stimulus spending, but not being willing to take on much more debt to bring it off. The U.K. is more in the American and Chinese camps.
Recent downturns in German exports, however, may move the German Chancellor off the dime, but so far, she thinks the major focus of the G-20 meeting should be bank regulation rather than deficit spending. Japan holds a similar position.
The International Monetary Fund has called on the trading nations of the world to commit to stimulus spending of 2% of GDP for 2009 and 2010, far above the current German efforts. Mr. Geithner, in a press conference later in the day, endorsed this goal, and he endorsed the IMF goal of funding an additional $500 billion in funding for their efforts to stabilize the weaker currencies of Asian and Central European economies.
In an earlier meeting between Mr. Obama with British Prime Minister, Mr. Gordon Brown, the Prime Minister emphasized an agenda for the G-20 that would completely restructure the original Bretton Woods agreement. This would mean a new structure for the IMF, the World Bank and internationalizing banking regulation. Mr. Obama did not specifically endorse these proposals at the meeting, but he may have come along some since that time.
The banks of the world are not enthusiastic about these new regulatory proposals. Their trade association has already met and drafted their own version of what would pass muster for them. You can guess as to the nature of their proposal.
Others think that Mr. Brown has set too ambitious an agenda for the meeting. He, it is said, needs to be seen as a heroic figure at the meeting, given his shaky status in his own country.
There is little doubt that the world needs a new Bretton Woods arrangement. Too much has changed since the 1944 agreement that reestablish mechanisms that promoted world trade. Before WWI, the British pound sterling had been used as the major trading currency in the world, but WWI and WWII saw the end of the preeminence of the pound, and Bretton Woods replaced it with the U.S. dollar.
A new agreement would not likely replace the dollar in its role as the major reserve currency in the world. There are simply no suitable currencies that have the heft to take its place. But the IMF and World Bank, just to name two, need to be restructured, allowing greater participation by China, India and Brazil, who are becoming important players in world trade. And, some mechanism needs to be reinforced to come to the rescue of the battered currencies of Europe's emerging markets. Adding a complete restructuring of the regulatory environment for the world's banks and coordinating stimulus spending to the agenda is a long reach.
This is a hugely important meeting, and its success or failure to rise to the occasion is still up in the air. My hope is that on areas where there is still disagreement, they will agree to meet again, perhaps later in the year, to reach a final settlement. Mr. Obama has not been if office long enough to be fully prepared for this giant a task.
Update 03/14/09
A report from the Wall Street Journal on Saturday concluded that there will not be a unified agreement from G-20 members to call for more stimulus spending. (Click here for full article.) Germany and France argued that their unemployment benefits and other social safety net made stimulus spending less necessary. There was agreement to increase funding for the IMF, but the amount will be left to a later decision, and there was agreement on licensing credit rating agencies. There will still be an emphasis by the U.S. to coordinate stimulus spending, however.
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