Finance officials from the Group of 20 nations will press their European colleagues to join a coordinated stimulus plan to tackle an impending recession when they meet in Sao Paulo this weekend.
UK Prime Minister Gordon Brown yesterday urged countries to heed the International Monetary Fund's call for coordinated action, even as other European Union leaders fretted about reining in budget deficits. A coordinated package would add 50 per cent more to growth than a similar amount spent in ad hoc measures by individual nations, said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.
“There are big areas of difference out there,” Weinberg said. “The US and IMF view is clearly that fiscal stimulus is needed. The Europeans are not quite so clear on this.”
The world’s biggest industrialised economies will all contract next year for the first time in more than half a century as the financial market seizure leaves companies and consumers starved of credit, the IMF forecast last week.
The G-20 meetings beginning today reunite officials for the second time in a month, after their first-ever emergency meeting in Washington in October. They’ll meet again in Washington at a November 14-15 summit of G-20 heads of state.
“It’s very clear that to navigate a path through the current difficulties and to regain some momentum in the world economy, the biggest economies need to be working together,” UK Treasury Minister Stephen Timms said in an interview in Sao Paulo on Friday.
‘Discipline’: The push for coordinated action by the US, UK and developing nations including Brazil suffered a setback November 6 when France dropped calls for a joint stimulus package.
More From This Section
A memo prepared for the French-led summit of EU leaders in Brussels underscored the need for “macroeconomic discipline,” bowing to resistance to a pump-priming program. The memo, proposing a European strategy to take to next week’s global economic crisis summit in Washington, endorses “macroeconomic policies that are sustainable and oriented toward stability”.
“Interest in a fiscal stimulus varies considerably from country to country,” Michael Mussa, former IMF chief economist, said in an interview from Washington. “Germany is not very enthusiastic.”
Central banks are already coordinating their response to the financial crisis, which began with the collapse of the U.S. subprime-mortgage market. The Fed, the European Central Bank and the Bank of England led a coordinated interest rate cut on Oct. 8 and they have all followed up with further reductions in the past two weeks. More coordinated moves are likely, Canadian Finance Minister Jim Flaherty said.
''There are ongoing conversations about who plans to do what when,'' Flaherty told reporters today ahead of the talks. ''I expect that these discussions will lead to some degree of coordinated action.''
'Real Momentum'
''What we're going to see this weekend is some real momentum for action building up for the meeting in Washington,'' said U.K.'s Timms, adding that one area of focus will be ''international coordination.''
The finance ministers of Brazil, Russia, India and China issued a joint statement yesterday calling for a coordinated push to halt the spread of financial turmoil. A stimulus plan is ''essential'' for the global economy, they said.
Brazil has been pressing for a greater role for G-20 in resolving the crisis, which has drained capital from Eastern Europe to Latin America at a time when emerging markets are being counted on to sustain almost all of the world's projected 2.2 percent economic growth next year, according to an IMF forecast.
''This is a global crisis and demands global solutions,'' Brazilian President Luiz Inacio Lula da Silva said today in a speech opening the meeting. ''The G-7 alone is not in conditions to conduct the world economy. The participation of the developing world is essential.''
Balancing Act
Canadian Prime Minister Stephen Harper said governments and central banks face a balancing act deciding how much to stimulate the global economy. There is ''a very real concern'' that policy makers may overdo support for the economy, jeopardizing longer term growth, he said Nov. 6. At the same time, he said his government is not ''by any means finished in terms of further steps that have to be taken.''
While Europe is dragging its feet on the fiscal stimulus, the U.S. may be the main opponent to tightening up financial regulation. European leaders want to give the IMF responsibility for financial stability around the world. The U.S. opposes any international regulator with cross-border authority, according to a senior U.S. official.
This weekend's meeting will explore ways ''to regulate global financial transactions that are outside government's control,'' Brazilian central bank President Henrique Meirelles said yesterday.
One problem facing negotiators today: There will be no representatives to deal with from the incoming administration of President-elect Barack Obama. That limits the scope for a deal ahead of the Washington meeting.
House speaker Nancy Pelosi said Nov. 6 that she's negotiating with the Senate and outgoing President George W. Bush a $61 billion stimulus package, the second in a year, and Congress may introduce further measures when Obama takes office on Jan. 20.
''The magnitude of action taken is unprecedented in postwar era,'' Mussa said. ''What has not happened is for them to sit in a room and decide anything in coordination.''
To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net