What does Sarkozy's walkout threat signal?
"It is easy to predict the agenda of the Conference. A number of resolutions will be passed declaring that many things ought to be changed, but without a serious intention of changing them."
So wrote JM Keynes on the eve of the London Conference of 1933.
I have said it here at essay length and I will put it down in bullet points today. Unless there is a tangible, concrete outcome at the G20 there is the risk that the world economy moves from deep recession to slump. The World Bank's prediction today of a 1.7% shrinkage of global GDP surpasses the IMF's prediction two weeks ago of a 1% fall.
It does not sound much but if you consider the famous IMF dictum that anything less than 3% growth is a defacto world recession, then we are four percentage points into the mire. The problem is not the depth: it is the length. The World Bank report today warns that a weak recovery in 2010 could get swamped by a new wave of financial backwash. We need to remember, essentially, that in addition to the "toxic assets" banks also hold good assets that can turn bad overnight driven by unemployment, wage cuts, bankruptcies and trade collapse.
It's not my job to advocate specific policies, but clearly the range of policy tools to stop this happening include: fiscal stimulus, monetary easing - via zero interest rates and printing money, currency devaluation and state protection for industries and sector.
Every one of these responses poses point blank the issue of competition and protectionism. I will spell out the brutal logic for the polticians: if I splurge my taxes on saving the British car industry, then I want at least some of the money to go to Birmingham (or in Sarkozy's case, Billancourt) instead of Bratislava; I print billions of new pounds, then it's going to drive the value of my currency down and boost my short term export position; I intervene to drive my own currency down ditto; and if I create jobs in North West England I want at least some of them to go to UK nationals with votes here, not Polish people with votes in Poland (this latter, incidentally, is impossible to specify under EU law).
So the only way of avoiding rival bailouts is to co-ordinate the bailout strategies. That does not mean everybody adopting the same strategies, or ignoring the huge cost to future taxpayers that the most stricken economies (Britain and the United States) will leave as a legacy.
The G20 will not, it is clear, deliver everything. But how should we interpret the threat by President Sarkozy to walk out and refuse to sign the communique if there is "false success with language that sounds good but contains no commitments"? The same as we have to interpret Barack Obama's decision to "get tough" with a Detroit car industry whose workers idolise him and whose bosses expected him to bail them out.
The politicians are coming under pressure from the electorate to deliver tangible protection for their jobs, their taxes and their fiscal infrastructure. This is called democracy - and unless it can be mediated through some form of commonly agreed actions at a global level it will tear the world economy apart.
The world economy incidentally has a head start on the protectionists: global exports have slumped - by an average 40% annualised rate in the developed world. This is not caused by "protectionism": it is caused by the fragility of globalisation, which I interpret not as a "threat to globalisation" but a flaw within it. Multi-country supply chains and the end of vertical integration, both features of the last 20 years, have caused the export-supply economy to react like a tortoise in fear. Each economy has withdrawn to its shell once credit began to dry up.
I now looks like there will be some tangible outcomes: there will be a world regulatory body - the Financial Stability Forum will become the Financial Stability Board. But it will not have any teeth other than surveillance and cross-border co-ordination. There will be money for the IMF but in part that's because, to maintain the EU rule of no state bailouts, the EU countries are having to bailout Eastern Europe via the IMF rather than using the ECB. Fiscal Stimulus - there will be strong words but action is constrained. Monetary stimulus will be interesting - because there will be pressure for Europe to fall into line and adopt some form of unconventional monetary easing (printing money).
Will it stop 1.7% GDP shrinkage turning into a long stagnant decade? Nobody knows, for the simple reason that we've never had a global recession in the globalised economy. I cannot find anybody warning in advance for example: watch out, if global growth falls by 6 percentage points then global exports will collapse by 40%. There is massive potential for one or more countries to mess things up - for example America could transfer the cost of the crisis to China in a big dollar devaluation: this is why I am getting calls from serious global businesspeople insisting that, for example, China's demand for a new global reserve currency is not off-the-wall and needs to be listened to.
If the shadow of the 1933 conference - which failed for good reason - stands over the ExCel building this week, then the shadow of JM Keynes should loom over the proceedings and the protestors.
Gordon Brown laid out five tests for success at the summit. Keynes laid out just one:
"Our plan must be spectacular, so as to change the grey complexion of men's minds. It must apply to all countries and to all simultaneously."
Keynes warned the world's leaders against economic solutions that left out social and economic justice - for weak nations and poor people. He warned the world in 1919 not to impose harsh reparations on Germany; and he warned them in 1933 not to impose deflationary policies that would prolong depression. And he also warned the left, the predecessors of today's protesters: though sceptical of the Conference outcome he warned the readers of the New Statesman not to wish for the failure of the half-measures already enacted. You will not like what happens if it does fail, was the message. And they did not.
Of the delegates he said:
"Fear and greed, duplicity and incompetence, but above all conventional thought and feeling, have brought their collective performance far below the level of the participants regarded as human individuals. But here is a last opportunity. Finis Coronat opus."
Which I think means, in Latin, get your act together.