The G20 cannot deliver a recovery, and the markets are increasingly jittery. So who, then, has a plan?
So it's every country for itself. The politicians of the world still mouth platitudes about a concerted response to the economic crisis, but their words ring ever more hollow. As does the claim of governments to be able to deal with the crisis which looms larger every day while markets watch and wait. The postponement of this week's meeting between Angela Merkel and Nicolas Sarkozy, the Tweedledum and Tweedledee of the crisis in Europe, is only the latest example of absence of the coordination that was meant to help us through.
Germany, as Merkel made plain with the sweeping austerity package revealed this week, will do what it thinks best for Germany, and nobody will divert it from a path of rectitude while she is chancellor. That leaves France and its president fuming on the sidelines and facing the implications of its decades-old build-up of debt off the state balance sheet. Unwelcome as it may be, he has to face the reality that France is now only one voice among many.
Both countries have to cope with the exposure of European banks to declining bonds — even more so given the lack of information about who holds the estimated $2.6 trillion outstanding to institutions in Greece, Spain and Portugal. The European Central Bank is thought to have bought Greek bonds whose value is equivalent to more than half its capital: how could it pile in to help others? Greek debt rescheduling would be simple enough, if the political will were there, without incurring a formal default — which is why market operators unload Greek debt to Frankfurt, knowing they will not be able to cash in on credit default swaps. But what would be the contagion effect of Greece rewriting its laws to reduce its exposure? Spain and Portugal are bogged down not only by their state finances but by low growth prospects and, in Spain's case, high unemployment. Moral hazard on a continent—wide basis could become inevitable. And then who would pay, given the level of indebtedness of the richer nations and the shortage of funds in international institutions? The chain of repercussions is threatening to unravel the euro, aggravated by the way in which the lubricating mechanism of interbank lending has seized up. As the crisis mounts, banks are becoming 100 per cent risk-averse, and nobody with capital to invest would think of directing it towards the eurozone.
Beyond Europe, the world has changed, too. The dollar is a safe haven again, while China is worried about the continuing debt crisis, the inability of other economies to keep their stimulus packages going, the negative effects on exports of EU austerity and the calls for Beijing to appreciate the value of the renminbi, although it has risen 14 per cent against the euro in four months.
For the moment, the “dollimbi” rules. But for how long, given the divergences between Washington and Beijing over a range of issues, ranging from Iran to climate change? If China is the bank of last resort, will Hu Jintao and Wen Jiabao step up to the plate? Given Wen's latest public remarks about living in a state of continuing crisis, it seems unlikely; China's leadership thinks it has quite enough on its plate without becoming the world's monetary nursemaid.
The meeting of G20 finance ministers last weekend brought no comfort, only a generalised call for austerity. But, if one thing is certain in this jittery picture, it is that most people have little idea of just how bad things are. Are we back in the days before the 1929 crash, or the popping of the South Sea Bubble? I hope that this jeremiad will prove wrong, but it is hard not to see a number of crows coming home to roost. In Britain the profligacy of the Gordon Brown era was asking for trouble, which the new coalition government now has to deal with. In France the parlous condition of the state finances and reluctance to reform are a time bomb. In Germany the Landesbanken are potentially explosive, and Merkel's refusal to play the euro game risks pulling the rug from under the currency. Spanish banks have huge exposure to property loans at home and Portugal across the border.
The ultimate winners will be the big developing economies, though they will have their problems. Brazil may be overbought and is going into an uncertain presidential election; Russia is energy dependent; China is paying the price for growth over the last 30 years and faces an enormous restructuring challenge. But at least they have an idea of where they are heading. It is difficult to say as much for Europe. That bad news is made even worse by our forgetfulness about how long and harsh slumps are. — © Guardian Newspapers Limited, 2010
(Jonathan Fenby is author of The Penguin History of Modern China and a director at research company Trusted Sources.)