Tuesday, June 16, 2009

The G8 is Unified on Fragile Recovery, Divided over Policy Details

Sources
Bloomberg: G8 plans to reverse stimulus as rebound signs grow
Reuters: G8 says economies stabilizing, recovery uncertain
Financial Times: Measures to tackle downturn cloud G8 meeting

The Group of Eight (G8), comprised of government leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, met in Lecce Italy last weekend to discuss the current economic outlook and monetary policy priorities. The G8 leaders took a united stance on the global economy’s tentative recovery, but remain divided on multiple important issues.

The leaders of G8 member countries disagreed on the timing of economic recovery strategies. U.S. and British leaders argued for a continued emphasis on combating the recession, saying that the recovery is still too fragile for the removal of strong federal support. Canada and Germany meanwhile, insisted that the time is right to begin scaling back mammoth government spending programs, in an effort to avoid inflationary problems. The French economic minister Christine Lagarde hesitated in the middle ground, saying that France should “anticipate” the planning of exit strategies, but that it was too soon to give up the stimulus measures.

G8 leaders also discussed the rift over European stress tests. U.S. and Canadian leaders pressed for increased transparency in European banks. They believe European countries should be doing more to test their banks, and that the results should be made public. European leaders like Germany’s Peer Steinbr├╝ck, resist disclosure, citing concern for investor confidence. The vulnerability of the Euro zone’s recovery was highlighted by the release of April’s industrial production numbers. Official figures confirm a staggering 21.6 percent drop from the previous year, the steepest year-on-year decline since Euro zone records began in 1991.

IMF managing director Dominique Strauss-Kahn didn’t sugarcoat his global recovery outlook, calling the current recovery “weak” and insisting that the social effects of the crisis aren’t going to diminish anytime soon. He predicted a recovery in average growth in the beginning of 2010 and estimated the peak in unemployment for more than one year from now, in early 2011. One thing is clear after the international debate of the Italy summit: there is not a lone, correct path out of the mire. Each country will emerge from the crisis in different shape, and at a different pace. The timing and content of recovery plans will vary as widely as the economic landscapes upon which they are based.

Discussion
1. Global financial markets are interconnected. As individual nations attempt to combat the effects of recession at home, does it make sense for leaders to strategize together? What are the benefits and the shortcomings of a global approach to recovery?
2. Who is right in the European stress test debate? Are the European leaders justified in resisting disclosure? What are the potential benefits of the increased transparency?

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