x Abu Dhabi, UAEFriday 21 July 2017

G8 opens on political and economic shaky ground

Conflict over how best to take the world out of recession seems certain to make waves.

Police stand guard at the G8 summit site in L'Aquila, Italy. During a three day meeting beginning on Wednesday, leaders of the Group of Eight will push for common positions on a range of subjects.
Police stand guard at the G8 summit site in L'Aquila, Italy. During a three day meeting beginning on Wednesday, leaders of the Group of Eight will push for common positions on a range of subjects.

ABU DHABI // Reeling from a series of deadly earthquakes, the small Italian town of L'Aquila could witness political and economic shock waves Wednesday as world leaders arrive for the annual summit of the Group of Eight (G8) industrialised nations. Even if the ground holds firm and a marital scandal embroiling the host relents, headbutting over how to lead the world out of recession appears certain to produce tremors of its own.

The three-day meeting will bring together the leaders of the group's eight members - Canada, France, Germany, Italy, Japan, Russia, Britain and the US - as well as those from five of the largest developing economies and representatives from 27 other nations and international organisations, a list that includes Egypt, the EU and the World Trade Organisation (WTO). At the top of the agenda is the G8's bid to revive long-stalled global talks on liberalising trade. Many hope freer trade will help resuscitate the ailing global economy. But developing nations on the other side of the trade debate will be at the meeting, including China, which is demanding that countries address the more fundamental question of whether the US dollar should remain the dominant currency for global commerce.

The agenda is also said to include a range of international issues, from devising common principles for financial regulation and trying to seal a commitment to halt global warming, to improving food security and addressing concerns about North Korea and Iran. But the debate in Italy risks being overshadowed by the controversy over its setting. L'Aquila is still suffering aftershocks from earthquakes that since April have killed at least 300 people and left thousands homeless.

Questions about how to evacuate world leaders, if necessary, and whether Italy was wise to move the meeting to L'Aquila have become a new source of embarrassment for the Italian billionaire prime minister Silvio Berlusconi, whose wife has vowed to divorce him over his attentions to other women. Few, therefore, expect the debate to produce any immediate boost for the global economy. "I don't think anyone is holding their breath that it will improve the situation," said Timothy Wong, the head of research at brokerage DBS-Vickers in Singapore, whose trade-dependent economy has been hit hard by the collapse in global exports.

The meeting's expanded attendance underscores what many economists say is an accelerating shift in economic power from the developed West to the developing East. "The G8 is becoming irrelevant," said Sven Behrendt, an associate scholar at the Carnegie Middle East Center in Beirut. "It's being slowly phased out and replaced by the G20," he said, referring to the 10-year-old Group of 20 industrialised and developing nations.

Set up as the Group of Six by France in 1975 to help western economies cope with the effects of the first oil crisis, the G6 was joined by Canada in 1976 and then rounded out by Russia in 1997. Given the rapid shift in the global economy in recent years, France and some other European members have been lobbying for the expansion of the group to a G14, with the addition of six up-and-coming economies - Brazil, China, Egypt, India, Mexico and South Africa.

Even as economists point to glimmers of recovery in Asia and the Gulf, pessimism is rising about the severity of the recession in the US and Europe - and the rising level of debt governments are racking up to fight it. The IMF now estimates that public debt in the world's 10 leading economies will rise to more than 100 per cent of their combined GDP by 2014. New economic data from the US have also broken a wave of optimism that swept world financial markets in the spring. Data showed that the world's largest economy lost nearly 500,000 jobs last month alone.

Analysts and economists in Asia and the Gulf say emerging markets will not fully recover without a return to health in the world's three largest economies - the US, Europe and Japan. "The downside risks if we don't get out of recession quickly are so huge there is no choice for fiscal and monetary authorities but to keep stepping on the accelerator," said Riccardo Barbieri, the head of international economics at Bank of America Securities-Merrill Lynch in London.

Most governments have already unleashed spending packages to stimulate their domestic economies and Mr Barbieri said such efforts had already succeeded in arresting the global economy's slide. "Things are getting better," he said. "The recession has become a lot less acute." Many economists and officials have pointed out, however, that domestic efforts tend to promote local businesses at the expense of imports, damaging the economies of exporting nations.

Stimulating global trade therefore tops the G8 agenda, with leaders focusing on whether they can revive the so-called Doha round of global trade talks named after the Qatari capital, where the talks began in 2001. Those talks foundered over an inability of developed nations to agree to eliminate agricultural subsidies, and developing nations' refusal to grant greater market access until they were. Pascal Lamy, the director of the 153-member WTO in Geneva, is scheduled to address the summit.

Even if an agreement to restart the talks has no immediate impact, it could send an important message, economists say. "It sends a signal that we're not moving towards protectionism," said Mr Barbieri. "And any protectionist moves we've seen since last summer reflect the severity of the crisis, but do not reflect a protectionist era." China has, meanwhile, asked for the meeting to discuss proposals for a new global reserve currency. Most nations conduct international trade in US dollars, and governments and central banks have to keep many of their reserves in the US currency, exposing them to potentially destabilising disruptions to trade when the US dollar fluctuates sharply against other currencies.

How Beijing might succeed in getting the dollar issue into the open is the source of some speculation, however. Questioning the health of the dollar is considered impolitic at best, self-fulfilling at worst. Officials from at least two G8 members, Canada and Japan, have said the currency issue would not be on the agenda, with Japanese officials warning that talk about the dollar tends to further weaken the greenback.

China, which along with Japan, South Korea and the Gulf is one of the world's largest investors in US government bonds, may be able to broach the issue tomorrow, when it and the other five developing nations at the summit are scheduled to issue their own statements. @Email:warnold@thenational.ae