A new world order

Now that the G20 summit is over, it’s time to repair the banking system, which, according to the Financial Times, originally caused the crisis.

Financial Times

Some useful progress, but still a way to go. That must be the conclusion of the Group of 20 summit in London. Gordon Brown, UK prime minister and chairman of the meeting, set out a six-point plan to save the world. This reflected some real achievements: a generous increase in funding for the International Monetary Fund, a new issuance of special drawing rights and a boost for trade finance. He sounded disappointingly thin on other key areas — notably cleaning up banks and future fiscal stimulus. More detail would have been reassuring.

Mr Brown cast the G20 meeting as part of a co-ordinated “fight back against the global recession” and said the “global crisis requires a global solution”. We may doubt aspects of the solution, but the crisis is undeniable. World growth is expected to decline this year for the first time since the second world war. The World Trade Organisation expects that trade will fall by 9 per cent — a worrying prospect.

It has also become clear that this crisis will not soon burn itself out. An important part of John Maynard Keynes’ works was his explanation of how economies could be caught in low growth traps. The longer the recession, the greater the destruction of happiness. An extended downturn will also increase the risk of the crisis expanding and deepening far beyond its current spread. In new democracies, whether in Africa or central and eastern Europe, this is a moment of genuine peril. In some poorer countries, it could even lead to war and famine. ...

The world is better for having held this summit. The possibility of dangerous contagion is lower and useful progress has been made across a range of issues, from the need to keep trade free to IMF quota reform. But leaders must remember that the crisis, which started in the banking system, will not be resolved until the banking system itself is fixed. That is where they must turn their attention now.