Colliding Domestic Interests and the G8

Ruth Davis
Junior Research Fellow, International Economics, Chatham House

How much does anyone expect from the G8 Summit next week? The G20 London Summit was a relative success largely because there was an overwhelming awareness of the intensity of the financial and economic crisis: it was crucial to send a signal of confidence to the global economy. The Summit was seen as a tool to turn sentiment around and to make a convincing case that IMF support would help vulnerable economies avoid financial, social and political disaster. However, the G8 Summit is not perceived as having the same strategic importance.

There is a danger the appetite for multilateral concessions and deal-making has dried up as leaders concentrate on their own domestic agendas. Angela Merkel, Taro Aso and Gordon Brown all face elections within the coming year, making new commitments difficult and also implying a lack of appetite for discussing the still high risks posed by the economic and financial situation.

Notably, Germany and Japan are in the worst shape amongst the G8 economies, with GDP set to contract by 6-8% in 2009 but all countries face plummeting GDP, rising unemployment and a severe deterioration in government finances. Unemployment is highest in the US, projected to reach 9.6% but France, Canada and Germany are not far behind, with the latter most likely facing a big surge in the official unemployment figures by the autumn unless there is a massive improvement in economic conditions. While budget deficits in the US and UK could be in the 10-15% of GDP range in 2009, cautious Germany might see the federal deficit rise to just 2-3% of GDP (over €50bn) yet even this is causing fiscal conservatives to call for rapid retrenchment.

In the midst of this massive global crisis it is ever more critical to seek heightened cooperation and global solutions to the problem of regenerating growth, curbing trade protectionism, adjusting imbalances, promoting development and addressing climate change. But there is a risk that the tide will turn in the other direction at L’Aquila. This may be due to the intense pressure leaders are facing at home but it is also due to the increasing anachronism and ebbing prestige of the G8. Leaders have little incentive to make compromises and trade-offs and spend money or political capital on initiatives associated with a lame duck forum. Indeed, Merkel made it clear today the G8 format “is no longer enough”.

Already, even before the Summit has begun a gap between words and actions has emerged. Firstly, the focus on ethics and propriety looks strange in the context of Berlusconi’s current personal standing. Secondly, Italy has cut its development budget for Africa, and will miss previously agreed targets, as a result of the financial crisis (along with France) – while maintaining that one of the Italian Presidency’s priorities is “allaying the impact of the financial crisis on Africa’s real economies”. In addition, many of the economic problems in Europe and continuing questions over the banking sector will be seen as issues that Europe itself needs to resolve – the US has probably come to the end of the road in terms of trying to persuade others to adopt its strategies (such as higher deficit spending and stress testing for the banks). Other G8 participants are unlikely to take up the baton.

The litany of mismatches and failed dialogues are not helping the credibility of the G8. Prospects for progress seem poor but no doubt some means will be found of claiming success.

Disclaimer: This blog is solely intended to spur discussion, while the opinions expressed are those of the author(s) and do not necessarily reflect the views of CIGI, Chatham House or their respective Boards of Directors.

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