Wednesday, February 18, 2009

The Stimulus, Part Three: Global Coordination

The G7 finance ministers and central bankers—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—held their annual meeting in Rome on February 14-15, 2009. Their closing communiquĂ© called for “stabilizing the global economy and financial markets.” To that end, the participants emphasized the need for global coordination, urging each country to stimulate its economy and oppose protectionism. The same conclusions will doubtless be reiterated at the larger G20 meeting, which includes another 13 emerging economies, to be held in London on April 2, 2009.

Assume the G7 and G20 can agree to coordinate their fiscal and monetary policies and that they choose a constructive course of action. What is the likelihood of success in carrying them out?

Let’s start with the U.S. The fiscal stimulus pass by an almost 100% partisan vote, with only 3 Republicans defecting in the Senate to enable its passage. Since the crisis erupted, the U.S. Treasury has wandered all over the map, changing its use of TARP funds on several occasions, and is likely to do so again. Securing passage of further stimulus measures is sure to be more difficult.

The United Kingdom faces a general election in 2010. The economic crisis in the U.K. has put the Conservative party (the Tories led by David Cameron) in position to win control of the House of Commons and establish the next government. The Tories are unlikely to support Prime Minister Gordon Brown’s efforts to stabilize the banks and the economy.

Italian politics are always fractious. Japan is running through prime ministers and finance ministers at a torrid pace. The governments of France, Germany, and Canada face internal opposition to their measures. France, Italy and Spain have granted subsidies to sustain national industries, threatening a rise in protectionism. Democratic politics, government versus opposition, in all 7 countries virtually assures that coordinated action will fall victim to partisanship inside the G7. Coordinating fiscal and monetary policies across the G20 is a pipedream. The best that can probably be hoped for is that G7 and G20 members do not work at cross purposes.

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