Economic Recession: G-7 for closing the Gap
Group of Severn or G7 member states keep meeting in several cities to advance the economic-cum-political interests world side of the leading capitalist nations. In 2008 Japan took over from Germany the presidency of the G7 group the USA, Japan, Germany, Britain, France, Italy and Canada- and would host regular get-together of finance ministers and central bank governors. Japan hosted a meeting of Group of Seven finance chiefs on February 9 in Tokyo to discuss challenges facing the global economy including fragile markets and high oil prices. Having convened a meeting of foreign ministers of G7 in Italy in Feb 2009, Japan will host a G8 (G7 plus Russia) leaders' summit in July.
The first meeting of Finance Ministers and Central Bank Governors held under the Italian G8 Presidency started with a working dinner in Rome, on 13 February 2009. Improving market integrity and transparency, with a special emphasis on fostering the application of appropriate regulations at the global level has been one of the main points of discussion, as a response to the current financial crisis. They focused on the stabilization of financial markets and the reform of international financial institutions. A special session, also attended by representatives of some international organizations, was devoted to food security and the need to support emerging and developing countries. The meeting concluded with the release of the Communiqué.
Billed more as a staging-post session ahead of a summit on April 2 of the G20 countries, a forum that includes the big emerging economies as well, the recent February 14 meeting of foreign ministers of G-7 discussed the issue of recession and has pledged to avoid protectionism as they battle the global economic crisis and sought US assistance also in the matter. The gathering is G7 finance ministers converged on Rome to discuss the economic crisis amid warnings from Germany and Britain that the world could revert to the dark days of the 1930s if governments resorted to protectionism.
Recession is debated upon literally every where. The G7 meeting, involving ministers and central bankers of the United States, Japan, Germany, Britain, France, Italy and Canada, is a step on the road to an April summit of the broader G20 grouping, which adds on the large emerging market economies. French Economy Minister Christine Lagarde said she hoped rich and developing countries alike would not lose sight of the target they had set themselves at a summit in November -- better regulation and supervision of banks and markets.
Recession processes set in last year with all of the large G7 economies contracted. In the last quarter of 2008, economic output in the Euro zone shrank more than any quarter on record and the picture was much the same in the 27-country European Union -- with GDP down 1.5 percent in both cases versus the preceding three months. Even several rising economic stars are slowing difficult times, even if they are not in quite the dire state of the more mature economies where the trouble began. China's economy is not advancing as fast as it did early 2008.
As the G7 meeting began on 12 Feb, Germany and Britain said the risk was that the world would otherwise see a repeat of the damaging protectionist spiral seen during the Great Depression. "The fight against protectionism has never been more needed than today," British Finance Minister Alistair Darling told Reuters in an interview. "We will have to do everything to ensure history does not repeat itself," Finance Minister Peer Steinbrueck told the German parliament earlier.
British Chancellor of Exchequer (Finance Minister) Darling claimed that the fight against protectionism has never been more needed than today. Darling told Reuters he had discussed the issue with new U.S. Treasury Secretary Timothy Geithner, adding: "I think the U.S. is very aware of its obligations to the world." German Finance Minister Peer Steinbrueck cited the "buy American" clause in an economic stimulus package the U.S. Congress was due to approve just as the ministers of the G7 were meeting in Rome. Darling also faces grumbles from his European partners, who see sterling's losses bolstering British firms' position in export markets.
The G7 was born in 1975 as an informal forum of coordination among the 7 world main industrialized countries. The inclusion of Russia in the G7 in 1998 represented the first expansion of the group since Canada joined in 1976. Thus the G8 was born.
II
As the ministers met, the U.S. Congress was in the throes of voting on an economic rescue plan that includes tens of billions of dollars for public building projects, with conditions including that they use U.S. steel and other U.S.-made goods. The massive economic stimulus package, approved later in the US Senate and Congress, has a hugely controversial condition attached. It is called "Buy American" and it means that all of the projects financed by the government's $800bn (£567bn) bailout should favor American iron and steel. The US Senate has voted in favor of Barack Obama's revised $787bn (£548bn) economic stimulus plan - clearing the way for it to be signed into law. It could, perhaps, even mandate American preference for all "manufactured goods". Could this be the start of a new American protectionism? Many speculate even a new trade war.
Against Obama's plan, Republicans had insisted on larger tax cuts instead of big spending programs. Among the measures in the approved package is a "Buy American" clause that had caused alarm among US trading partners. The EU and Canada said that provisions favoring American-produced materials for government projects risked provoking retaliatory protectionist measures.
The G7 also touched on China's state-controlled currency, seen as making its manufactured goods unfairly cheap in world markets. The draft said the G7 countries welcomed China's commitment to a more flexible currency and expected the yuan to continue to appreciate, though they avoided specific reference to other currency trends some of them are worried about, notably the decline of the British pound over the past year.
The US and other Group of Seven industrialized countries have stepped back from criticism of China in a push for greater cooperation with Beijing and a more unified response to the global financial crisis.. G7 finance ministers adopted milder language than recently regarding China's handling of its currency.. Tim Geithner, US Treasury secretary, also used a more conciliatory tone towards Beijing than he did last month, when he accused China of manipulating its currency to benefit exporters. The US and the UK in particular pushed for the group to take a more conciliatory approach towards Beijing ahead of a broader G20 summit in London on April 2. The G7 has realized that China needs to be brought into the fold of the global financial system rather than be treated as a pariah just because of currency inflexibility. There is also a realization that as the world's largest foreign exchange reserve holder and the US's largest creditor nation, China not only holds the purse strings but its continued growth is crucial to helping the world recover from the economic crisis
Hilary Clinton, US state secretary labeled a "positive, co-operative relationship" between Beijing and Washington as "vital to peace and prosperity, not only in the Asia-Pacific region but worldwide" and also announced the resumption of military contacts between the two nations. However, in a sign of potential for tension, China on Sunday hit out at a "Buy American" provision in the $787bn economic stimulus package approved by the US Congress last week. In its communiqué, the G7 welcomed China's fiscal stimulus and "continued commitment to move to a more flexible exchange rate" "“ notably milder language than the G7 meeting in Washington in October. At his press conference, Geithner said the US was committed to working with China.
Under pressure form G-7 several regional forums have also resorted to debating the recession impact. The ASEAN groups Indonesia, Thailand, Malaysia, Singapore, the Philippines, Brunei, Vietnam, Myanmar, Cambodia and Laos. Vietnam and Japan will chair finance ministers' meetings of the ASEAN plus China, Japan and South Korea (ASEAN+3) this year and it would be important to build trusting relations with Vietnamese officials and have a common view on many issues. Whatever affects the top capitalist nations would also have its impact unleashed on the rest of the world and that seems to be emerging global law of governance.
III
Clearly, the USA now depends on borrowed money for the execution of the stimulus plan. Finance ministers at a G7 meeting in Italy said raising barriers to free trade would make the downturn worse. G7 ministers said stabilizing the world economy and financial markets was their priority.
The G7 industrial powers, fearing a rise of protectionism, "will do all they can" to combat recession and avoid distorting free trade. The draft statement, a copy of which was obtained by Reuters as G7 finance ministers met in Rome, sought to allay fears that governments determined to protect jobs and national industries would abandon commitments to fair cross-border competition. The draft G7 statement said stabilizing the economy and financial markets was paramount right now, meaning all had to work together and use all possible policy options to maximum collective effect. "We will continue to work together to avoid undesirable spillovers and distortions," said the draft.
In a statement after the meeting, new US Treasury Secretary Timothy Geithner dismissed the notion of trade war concerns. "All countries need to sustain a commitment to open trade and investment policies which are essential to economic growth and prosperity," he said. Ministers also called for urgent reform to the International Monetary Fund, saying the crisis had shown weaknesses in the world financial system. G7 agreed that a reformed IMF, endowed with additional resources, is crucial to respond effectively and flexibly to the current crisis. Other points included: Praise for recent economic moves by China; Help for banks; and the need for a speedy end to the Doha talks on world trade.
The statement highlighted mounting unease over what looks like a contradiction between commitments of principle to free trade and measures that look different in practice, like a French car aid plan that Germany has attacked or the "Buy American" clause in Washington's $787 billion stimulus package. The draft statement, however, passed over both the British pound and the yen, making reference only generally to excessive currency volatility and to China's yuan.
The U.S. "Buy American" clause is not the only measure that is causing concern within and beyond the G7 group. Governments' rescues for French and Italian carmakers have also raised concern as has a campaign within Britain to keep jobs in hard times for British citizens. It was billed as a meeting to discuss the broad issues of the economic crisis, not to decide major policy initiatives - and that's what it was.
Britain's Alistair Darling said Feb G7 was a stepping stone to a meeting in London in April of the G20 group, which also includes big emerging economies such as China and India.G7 is keen to obtain commitments form all emerging economies to contribute to salvage the recession which is basically a western phenomenon.
An Observation
The G7 industrial powers, all in recession or just about, are under pressure to prove they can work together to stop the rot rather than engaging in a "beggar-thy-neighbor" battle where each country fends for itself at others' expense. The meeting's final statement refers to the need for free trade, but avoids giving a new steer on exchange rates, another area of tension in world trade competition.
The current financial crisis, regarded as the worst since the 1930s, blew out of the United States when a housing boom ended, and with it a boom in mortgage debt derivatives that banks and investors worldwide had bought into. Fresh data from Europe served a reminder of the scale of the economic downturn on Friday and Dominique Strauss-Kahn, managing director of the International Monetary Fund, said the worst had probably still to come. Although the currency has appreciated more than 20 per cent against the dollar since 2005, many US politicians accuse the country of artificially depressing it "“ a charge made by US president Barack Obama during his election campaign.
Having close economic and financial links with Japan, now the US-led west is focused on Chinese economy least affected by the recession and seeking the Peking help. The US-led leading industrial countries forum, G7, is seen keen not to fuel further tension at the moment over competition via currency values. They said they would work together to support growth and jobs. The 'Buy American' clause has raised fears that protectionism could be growing in the world's largest economy.
Obama has said the plan - a package of tax cuts and spending - will "save or create more than 3.5 million jobs". Republicans argue the tax cuts are insufficient, and that the economy will be saddled with debt for years to come. What's clear is that Obama's current high standing outside America's borders could be diminished if - on one of his first foreign forays to the G20 meeting in London this April - he has to admit that he's overseeing a shift in American outlook towards a new protectionism. Interestingly, the entire world is bound to bear the brunt as and when the USA undergoes repressions.
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