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G8 & G20: Can World Leaders Agree On Strengthening Economic Recovery?

  • Charles Recknagel

Russian President Dmitry Medvedev and his wife, Svetlana, are welcomed at Toronto Airport for the G8 summit.

Russian President Dmitry Medvedev and his wife, Svetlana, are welcomed at Toronto Airport for the G8 summit.

Leaders of the G8 and the G20 countries, who are meeting back-to-back in Canada for three days, do not usually hold their summits at the same time.

But this year, their agendas share one major and difficult question that makes the timing not only convenient but perhaps necessary: How much should governments try to guide the world's still fragile recovery from its string of recent economic crises?

The G8 groups together the world's leading industrialized economies: the United States, Britain, France, Germany, Canada, Italy, Japan, and Russia.

The G20, a newer grouping, adds leading emerging economies and other regional powerhouses to the mix, including Argentina, Australia, Brazil, China, India, Indonesia, Mexico, South Korea, Saudi Arabia, South Africa, Turkey, and the European Union. Together, those states represent some 90 percent of the global economy.

But not all of their economic interests align. So, how best to work together to reform the global economy?

"Everybody is facing a series of conundrums of which there are no settled simple answers, all of which have big dogs in the fight on opposite sides of the bone," says economist Richard Parker, a professor at Harvard University. "Right now, we have got the United States pushing the Europeans not to contract their deficits too quickly, fearing that a sharp cut in public sector deficits will be a negative in terms of stimulating growth.

"Simultaneously, the United States and the Europeans have been hammering on the Chinese to let their currency float upwards and to stimulate Chinese domestic consumption as a growth strategy."

Sharp Differences

Some of the sharpest differences are in the positions of two of the world's key economic players: the United States and Germany.

German Chancellor Angela Merkel has called on Europe to go on an austerity diet in response to the latest economic crisis to hit the EU: the need to rescue Greece from a crushing burden of government debt. While the rescue has given Greece a respite, the emergency has also raised the specter that other economically troubled EU states like Portugal and Spain might eventually need similar help.

Police patrol the streets of Toronto ahead of the G20 summit.
However, Merkel's call for EU states to dramatically cut back spending just when the economic recovery is gaining momentum worries many other capitals. Washington has been particularly vocal in questioning Merkel's wisdom, saying belt-tightening in one of the world's key economic regions could put a brake on growth around the globe.

U.S. President Barack Obama this past week wrote to European leaders urging them not to weaken their private sector demand or put their hopes in exports to balance their economies. His urgings, clearly aimed at Germany as Europe's leading exporter, were subsequently rejected by Merkel, setting the stage for a possible confrontation this weekend in Canada.

How Much To Regulate

Similar differences over the role of governments in guiding the recovery were likely to plague discussions of other issues at the top of the summits' agendas, including how much to regulate the world's financial markets.

Here, too, Washington and many European capitals find themselves at odds, Parker says.

"This [U.S.] Administration wants a very light regulation of financial markets because its sees the financial sector as the big new growth engine of America's economy both domestically and globally," Parker says. "And the Europeans in particular take the attitude that this very light regulatory model risks another string of Wall Street meltdowns over the next decade, and say we Europeans have to bear a lot of the price and want stricter regulations."

Such deep-seated differences may in part reflect cultural as well as economic values. The U.S. approach tends to prioritize individual freedom, the European approach to emphasize collective responsibility.

In the run-up to the Toronto summits, the gap between Washington and Berlin was on display even as both Obama and Merkel called for increased financial regulation to help prevent new global economic crises.

'No Bailouts. Period'

Obama has already launched his own national initiative to reform America's financial center, Wall Street. Speaking on May 20 ahead of the successful Senate passage of his program, he called it necessary to protect taxpayers from having to repeatedly rescue the economy from the damage done by financial speculators.

"Because of financial reform, the American people will never again be asked to foot the bill for Wall Street's mistakes," he said. "There will be no more taxpayer-funded bailouts. Period."

But Obama's initiative stops far short of the kind of regulation Merkel is calling for. That includes urging new taxes on banks and stock market transactions to help pay for the costs of financial crises.

Describing her goals for the Toronto summits, Merkel said, "We will prepare for the G20 and G8 meetings so that we can go ahead with as united European position as possible that also covers a bank levy and the taxation of financial markets. Germany and France, for example, are in favor of calling more on those who caused the crisis to pay up."

Potential High Drama

The summits' participants were equally far from united on how tightly to regulate even some of the financial institutions the public most often associates with speculation: offshore banks.

Britain, for example, favors lighter regulation of offshore banks than do many other countries because the lightly monitored banks attract investors from around the world and help make London a major financial hub.

All these differences make the twin G8 and G20 summits in Canada a time of potential high drama. Adding to the tension is the fact the participants know that public demands for them to show progress are high and that patience is running thin.

Toronto will be the fourth summit meeting of the G20 since the global economic crisis was at its height in late 2008. The three previous meetings -- in Washington, London, and Pittsburgh -- so far have produced more declarations of solidarity than common steps forward.

The leaders of the G8 -- the world's eight most industrialized countries -- began their summit on June 25 in Huntsville, some three hours outside Toronto, Canada's financial hub. That summit should end around midday on June 26.*

Then the G8 leaders move to Toronto for the summit of the G20. That summit, beginning with a welcoming ceremony on the evening of June 26, will run through June 27.

*CORRECTION: Story amended to correctly identify Huntsville as lying three hours outside Toronto.

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