In a veiled warning to the next American President, Gordon Brown described
protectionism as the “road to ruin” yesterday as international tensions
surfaced at the start of the G20 summit in Washington.
As world leaders assembled for dinner at the White House last night at the
start of the two-day meeting, the backdrop was one of plunging sales and
surging unemployment. The New York stock market dropped 350 points after
official data showed that US retail sales had fallen by 2.8 per cent in
October, the biggest slide for 16 years.
The mood was darkened further with confirmation that the eurozone was now in
the grip of recession for the first time since the creation of the single
currency in 1999.
The news will add impetus to calls for internationally co-ordinated tax cuts,
public infrastructure projects and other measures to stave off a severe
global recession. Although some measures to reform international financial
oversight are set to be agreed at the G20 meeting this weekend, no
substantial deals are expected before the inauguration of Barack Obama in
January.
Mr Brown was already risking confrontation with the President-elect in barely
coded criticism of a planned measure to bail out America’s ailing carmakers,
a plan Mr Obama supports. “I do think it is really important that we send
out a signal today that protectionism would be the road to ruin,” the Prime
Minister said, in a speech to the Council of Foreign Relations in New York.
“If we get into a situation where countries made decisions irrespective of
what happened anywhere else, then we will see the same problems of other
times. The dividing line here is between an open society capable of trading
round the world, against a protectionist response that happened in the 1930s
and is totally unacceptable.”
The EU said that it was ready to take action against the US at the World Trade
Organisation if aid for the stricken US car industry was judged by the
European Commission as illegal under international rules. The US Congress
approved a $25 billion (£17 billion) aid package for American carmakers in
September, although no timetable was fixed for payments to be made.
Republicans on Capitol Hill oppose plans championed by Nancy Pelosi, the
Democratic Speaker of the House, to use taxpayers’ money to rescue the big
three car companies, General Motors, Ford and Chrysler. The industry employs
about three million people across the country, and iconic of the American
Dream. Wall Street is scared that should the aid be delayed, General Motors,
which gave warning last week that it would run out of money by Christmas,
will go bust.
Concerns over the deal helped to drive down stocks already hit by worse than
expected retail figures. Yesterday’s economic numbers also showed that car
sales fell by 34 per cent in the past three months, as Americans grew more
fearful of losing their jobs and banks slashed overdraft and credit card
limits. Consumer spending has a critical role in the US, accounting for two
thirds of economic growth.
Fears that the US unemployment rate was set to breach 7 per cent by Christmas
grew after Citigroup, the world’s biggest bank, said that it was laying off
10,000 workers.
The figures were grim on the other side of the Atlantic, too. Official figures
showed that the 15-nation eurozone economy shrank by 0.2 per cent in the
past quarter, on the heels of a similar drop in the previous three months.
Fears grew that the contraction was set to accelerate sharply in the present
quarter.
Germany was among the hardest-hit countries, with its economy shrinking a
hefty 0.5 per cent in the third quarter after a 0.4 per cent drop in the
three months before that. Italy suffered a similar 0.5 per cent cent
contraction, its worst slump for a decade, while Spanish GDP dropped for the
first time since 1993. The Irish Republic and Denmark are also now gripped
by recession. In a surprise development, the French economy continued to
expand in the third quarter — albeit with a meagre growth of 0.1 per cent —
defying predictions of a far worse outcome.
So far, eurozone economies — which account for 16 per cent of world output and
about 319 million people — have not seen unemployment rise rapidly but the
EU estimates that it will increase steadily over coming months. It is also
expected that the European Central Bank will be forced to cut interest rates
to boost demand; some economists think that the bank will reduce the cost of
borrowing by a full percentage point from 3.25 per cent in the coming weeks.
Differing agendas
United States The US is scared of new, onerous regulation and is urging
European countries to respect free-market principles on the basis that
long-term state intervention will damage economic growth. But US policy on
bailing out troubled industries is split: Barack Obama, the President-elect,
wants to use federal funds to rescue American car companies; many
Republicans do not.
Britain Gordon Brown has a long list. To start with, he wants
“co-ordinated fiscal stimulus packages” — which means getting countries to
increase public spending to create new jobs and offer tax rebates to
families. He wants the IMF to create a council of experts to monitor the
markets for danger signs — his much-vaunted early-warning system — and the
IMF’s coffers to be boosted by cash-rich states such as Saudi Arabia and
China. He is also calling for a clean-up of the banking system, including a
network of regulators to scrutinise the world’s biggest banks.
France President Sarkozy is also pushing for cross-border regulation,
meaning he wants to control French banks even when they are operating
outside French borders. He sees the crisis as an opportunity to depose the
US dollar as the king of currencies, and replace it with the euro. Mr
Sarkozy would also like an overhaul of the world financial architecture,
including making rating agencies more regulated and forcing accounting
standards to be the same worldwide.
Germany The Germans are deeply suspicious of secretive hedge funds,
which control about $2.5 trillion worth of assets and whose activities are
not regulated. They blame the hedge funds for market volatility and driving
down shares by short-selling. Angela Merkel, the Chancellor, also backs
greater powers for the IMF to oversee international companies, revised rules
for rating agencies and making it harder to hide risks off company balance
sheets.
Russia President Medvedev wants more say in the IMF, so he is teaming
up with Mr Sarkozy to back President Bush into a corner. He wants
alternatives to the IMF as lenders of last resort and is willing to
contribute to the cost of the new agencies. Russia has also pressed for
international budgetary and economic rules to prevent any further crises
China China wants to press the West for a bigger role in global
financial bodies such as the IMF but at the same time it has been trying to
lower Western expectations that it will join in global actions. It cites as
reasons its own economic problems and limited resources as a developing
country.
Brazil and other developing nations These want changes to the voting
structure at the IMF and the World Bank’s to give them more of a voice.
