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G20 and policy perspectives.

There were differences at the G20. Obama was willing to accept some blame on the part of the United States. Sarkozy wanted to energetically wave the finger and blame that old-French, Gaullist, target the “Anglo-Saxons” though in the face of the first black President of the United States this seemed always a non-starter. Was there a split between Europe and the United States? Policy stances, as outlined below, are taken along domestic political and often historically-determined lines.

Sarkozy stressed international financial regulation and said he would leave if regulation was not addressed, and most of his compatriots just shrugged their shoulders or laughed. The French administrative tradition in economic life, reinforced by Napoleon, goes back to before the Revolution. He did himself some damage by his ill-thoughtout grand gesture. Obama took a very pragmatic view: such big staged political events can be boring and so a little bit of positioning and sparkle simply added to sense of occasion. However Sarkozy is stuck with an inflexible French economy that he himself wanted to change along UK-lines. His reforms have stalled. He then proposed a protectionist policy for re-financing the French car industry. This caused a row in Europe and even the French car-makers seem to have rejected the idea. I doubt if he did himself much good at the summit.

Merkel, the German Chancellor, is a different and tougher personality. Her current political stance is based on a fiscal conservatism that is in marked contrast with the situation facing Gordon Brown. This is merely a current political expression of a long-standing German fear of inflation. In the post-World War II world, Germany, in a difficult economic climate will always chose unemployment over inflation. Its institutional arrangements were designed to avoid the hyper-inflation and instability of the Weimar Republic. UK leaders, especially in the Labour party, will favor inflation over unemployment. Merkel was opposed to a further stimulus package in German because of the long-standing monetarist approach to financial regulation and conservatism. That she became reconciled to increasing the Special Drawing Rights of the IMF, and IMF finance in general, suggest that she feels that a significant (absolute) contraction in World Trade would be deflationary (itself a problem as consumers postpone purchasing decision in the hope of getting the goods even cheaper in the future)with significant consequences for German exports. The prospects for international inflation in the longer-term are significant. Merkel, and Germany in general, do not really like money for poor countries without “strings attached”.

Gordon Brown has had a reasonably good summit. He seemed to be at the centre of the action though the role was very much shared with Obama. Obama seemed to have a good time, if his broad grin on many informal photographs is anything to go by. The President made the most of the diplomatic gathering to meet as the new guy of the block with significant world leaders, including the Presidents of Russia and of China. The world, not just France and Germany, will not be lectured to on economic policy by the Americans as a result of the crisis and it perceived origins in the United States. Obama, going for strong domestic economic stimulation, seems to have stepped with great care, though he was clear that world recovery needed additional action elsewhere. But Brown still has a domestic policy problem. His government is in debt. Further domestic stimulation is problematic. Increasing the debt even further takes away from the flexibility of future governments. Yes, inflation now is not a problem, but what about down the line? The UK preference differs from that of Germany but there is still domestic disagreement. He needs to see the world economy starting to expand as much as for the sake of the UK economy as for the rest of the world. He had a good summit but his political career is still under threat and his policy options are restricted..