Wed, Oct 07, 2009 - Page 9 News List

Recovery may be jobless and joyless

The mood at the meeting of the IMF and the World Bank in Istanbul was one of quiet confidence, yet there are worrying signs

By Larry Elliott  /  THE GUARDIAN , LONDON

The mood is different this year. Not exactly whooping with joy, you understand, but finance ministers and central bank governors gathered in Istanbul this weekend exuded a sense of relief and quiet confidence.

Relief because activity has started to pick up after its precipitous fall around the turn of the year. Quiet confidence because there is a belief that lessons have been learned over the past 12 months.

When the IMF and the World Bank last met in Washington in October last year, the global financial system was on the brink of ruin. Bank after bank had run into trouble following the collapse of Lehman Brothers in mid-September. Iceland looked like it was about to go bust. In Britain, cash points would have stopped working had the government not come up with a rescue package that provided billions of pounds of fresh capital in return for part-nationalization.

Dominique Strauss-Kahn, the fund’s managing director, says countries were forced to collaborate by the scale of the crisis, and the sense of togetherness will not vanish now the outlook is better. The replacement of the G7 by the G20, it is hoped, will improve global governance and make it easier to tackle the imbalances that lay at the root of the problems.

There has, of course, been plenty of this sort of stuff before. Back in 2006, well before anyone had heard of sub-prime mortgages, the fund launched a program of multi-lateral surveillance designed to see whether the policies being pursued by the big players on the global stage were compatible with reducing global imbalances. They weren’t, but nothing happened.

The feeling in Istanbul was that it is different this time. Having stood on the edge of the abyss, individual countries are now prepared to look beyond their narrow self-interest to consider whether policies help or hinder the cause of global economic stability.

It would be wrong to think that nothing has changed. There is a recognition that the financial system was close to collapse 12 months ago and that collective action helped prevent a severe recession turning into something worse. The decision to make the G20 — where the bigger developing countries are represented — the body that counts for global economic policy is a good one. The G7 will stagger on as a more informal gathering of finance ministers for a quiet chat, but it has had its day.

There is a willingness to accept that regulation of the sector should be toughened up. Unless banks are forced to hold more capital, UK finance minister Alistair Darling said on Saturday, we will quickly be back in the mire. He’s right about that, and the G20 in Pittsburgh displayed a greater appetite for more intrusive supervision.

So, yes, the atmosphere is different. Things have changed. The problem is that they have not changed nearly enough.

Growth has nudged up, but as the IMF said last week it has so far relied almost exclusively on governments doing the spending on behalf of the private sector, and on an inevitable rise in inventories following savage de-stocking. That is no basis for strong, sustained growth and there are already some worrying signs — US unemployment, last week’s survey of manufacturing in the UK — suggesting that the recovery is running out of steam. With governments likely to come under pressure to tackle budget deficit from both the financial markets and their voters, there is a risk that economic policy will be tightened too soon. The risks to growth next year are to the downside.

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