Obama Faces Disappointment at Summit

President Obama is likely to hear the word "no" a lot at the April 2 economic meeting in London.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

March 23, 2009

The G-20 summit won't give Barack Obama -- or the global economy -- the boost that both sorely need. The April 2 meeting in London kicks off the president's first major international foray since taking office. Leaders of the world's biggest economies once had high hopes of using the forum to revive global demand, break the logjam in credit markets, overhaul financial regulations and halt the growing trend toward protectionism. Not anymore. Now, they'll have to struggle for even a passing grade.

"It could be a big setback," says Simon Johnson, former chief economist of the International Monetary Fund (IMF) and a professor at Massachusetts Institute of Technology's Sloan School of Management. "The Europeans are being totally recalcitrant. It's a complete failure of leadership at the global level."

Obama is pushing hard for more stimulus to galvanize the global economy and pull it out of recession. He endorses the IMF view that the world needs a fiscal jumpstart equivalent to 2% of the gross domestic product (GDP) of the G-20 economies for 2009-10. The U.S. has already committed to 5.9% of GDP, but of the rest of G-20 members, only China and Saudi Arabia are willing to go anywhere near that number.

Europe just won't budge. Germany and France in particular argue that any measure of their stimulus should take into account their automatic stabilizers, the extra unemployment benefits and other welfare payments that kick in when the economy sours. That spending is causing their national debts to soar, and they're not willing to worsen it.

"It's not that Europeans aren't spending money," says Barbara C. Matthews, founder and managing partner of BCM International Regulatory Analytics. "They're just not spending it the way we are."

The Europeans will be disappointed, too. They want to see a U.S. plan to overhaul the financial regulatory system as a first step to doing more. "The Germans are saying, 'Why should we throw money at problem if this won't work until U.S. fixes its financial system?'" says Sebastian Mallaby, the Paul A. Volcker senior fellow for International Economics at the Council on Foreign Relations. The European Union will welcome U.S. plans to oversee nonbank lenders and raise capital standards, but the EU states will want more details than Obama is likely to have ready to offer them. Greater certainty about the regulatory landscape would strengthen confidence in surviving banks and make it easier for them to open their spigots and start lending once again.

Efforts to boost IMF lending will fare better but still fall short. Obama wants to see the fund's capacity tripled to $750 billion to deal with emergencies. But he will probably have to settle for about $500 billion. Getting to the larger figure would require major contributions from the large emerging markets, particularly China. "China is not going to come in without a commensurate increase in their voting power," says Carmen Reinhart, a professor of economics and public policy at the University of Maryland. Reinhart says any such increase in emerging market influence would come largely at Europe's expense, and Europe won't allow that.

There'll be some progress, too, on trade financing. The World Bank, the Asian Development Bank, the Inter-American Development Bank and the European Bank for Reconstruction and Development will all step up lending and grants with G-20 help. That'll encourage private institutions to provide insurance against nonpayment and other risks that enable exports to flow.

But that won't be enough to make up for the lack of accord on stimulus. The result will be a slower, uneven recovery. It will take longer to revive demand in countries that spend less, notably the euro zone economies but also Japan. But they'll still benefit some from the growth in nations with more aggressive spending, as businesses and consumers in those countries can afford to buy more imports.

That in turn will add to protectionist pressures. Antitrade sentiment usually builds in a recession. It'll be amplified if citizens and governments decide the money they've spent is leaking abroad and delaying their own economic revival. Despite pledges to avoid protectionism, 17 of the G-20 have implemented new barriers, ranging from tariffs and subsidies to licensing requirements and antidumping duties.

"The U.S. will come out of this OK," says Nariman Behravesh, chief economist of IHS Global Insight. "We're still a large economy, driven largely by domestic considerations. The bigger concern is for countries that count, and continue to count, on export led growth. It won't be as nice a scenario for the U.S. if the rest of world does not pitch in."

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