- The Washington Times - Sunday, November 16, 2008

World leaders from the Group of 20 meeting Saturday in Washington at the Summit on Financial Markets and the World Economy endorsed the use of expansionary monetary and fiscal policies to shore up their deteriorating economies.

Acknowledging that “economic momentum is slowing substantially in major economies and the global outlook has weakened,” the G-20’s communique pledged “closer macroeconomic cooperation to restore growth, avoid negative spillovers and support emerging-market economies and developing countries.”

However, conspicuously absent in the statement was any mention of the global imbalances that Treasury Secretary Henry M. Paulson Jr. had emphasized in a major speech last week. Those imbalances include the massive trade deficits the United States has been running and China’s huge and growing trade surpluses.

“If we only address particular regulatory issues - as critical as they are - without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward,” Mr. Paulson said Wednesday.

The G-20 includes the wealthy industrialized nations comprising the G-7 (United States, Japan, Germany, France, Britain, Italy and Canada), Australia, the European Union and several emerging-market nations (Brazil, Russia, India, China, Indonesia, South Korea, Mexico, Argentina, Turkey, South Africa and Saudi Arabia).

The post-summit statement supported a bigger role for the International Monetary Fund and said the G-20 should “stand ready to increase” the resources of the IMF, the World Bank and other multilateral development banks. Japan recently pledged to lend $100 billion to the IMF, implicitly encouraging other nations with large foreign reserves, such as China and the oil-producing countries of the Middle East, to provide loans as well.

The statement said the leaders would “strive to reach agreement this year” on the tariff-cutting formulas necessary for the completion of the Doha round of multilateral trade negotiations, which collapsed in Geneva in July. “We instruct our trade ministers to achieve this objective and stand ready to assist directly,” the communique states.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said the leaders could have done much more to finalize Doha.

“A major accomplishment that the G-20 could in fact deliver would be to close the deal on Doha. The outstanding issues are few, and they could all be resolved in bilateral agreements between the assembled leaders,” Mr. Hufbauer told The Washington Times before the summit convened. “By contrast, discussions on the financial architecture have barely begun, and there’s no possibility for an agreement beyond the creation of working groups to report back in another six months,” he said.

Indeed, the communique called for immediate actions by March 31, in preparation for the G-20’s next summit scheduled for April 30.

When the G-20 meets in April, Barack Obama will be president. Mr. Obama did not attend the summit, explaining that “we have only one president at a time.” Instead, he sent two emissaries, former Secretary of State Madeleine K. Albright and former Republican Rep. Jim Leach of Iowa, who met with many of the world leaders over the weekend.

Delivering the Democratic Party’s radio address on Saturday, Mr. Obama called on Congress to extend unemployment benefits during a postelection lame-duck session. Mr. Obama described the current situation as “the greatest economic challenge of our time.”

The leaders of the world’s largest economies and international organizations convened the economic summit in Washington on Saturday as many European economies slipped into recession; financial markets remained under “severe strain,” according to Federal Reserve Chairman Ben S. Bernanke; stock markets around the world were shedding trillions of dollars of value; and many U.S. business indicators painted an increasingly dire picture of the American economy, which has already lost nearly 1.2 million jobs this year.

On Friday, as the leaders prepared for a pre-summit dinner hosted by President Bush, new economic figures revealed that the euro zone - the 15 European countries that have adopted the euro as their currency - entered its first recession since the shared currency was launched in 1999. Economic activity in the euro zone declined by 0.2 percent during the third quarter, after a contraction in the second quarter. Germany’s economy, the largest in Europe, declined by 0.5 percent during the third quarter.

In the United States, the Commerce Department reported that retail sales fell for the fourth month in a row. The 2.8 percent decline in October was the steepest drop since the statistic was first compiled in 1992. The U.S. economy declined 0.3 percent during the third quarter.

Meanwhile, Freddie Mac and Fannie Mae, the giant mortgage-financing agencies that the federal government took over in September, reported record losses for the third quarter of $25.3 billion and $29 billion, respectively, indicating that the financial fallout from the housing crisis continues. The Standard & Poor’s 500 stock index has lost 41 percent of its value this year.

Economic growth in China is expected to significantly decelerate, prompting the government to announce a $600 billion stimulus plan.

Worldwide credit markets, which froze after Lehman Brothers declared bankruptcy in mid-September, have been thawing in recent weeks after the Federal Reserve and other central banks poured massive amounts of funds into the money markets through the unprecedented creation of extraordinary “liquidity facilities.” Since the financial crisis first erupted in August 2007, the Fed has lowered its target short-term interest rate from 5.25 percent to 1 percent. But the Fed is running out of ammunition as the effective federal-funds rate in recent weeks has been hovering around 0.3 percent, well below its official target of 1 percent.

The economic situation is not expected to improve anytime soon. The IMF recently projected that the euro-zone economy will contract 0.5 percent next year, Japan will decline by 0.2 percent, the British economy will shrink by 1.3 percent and the U.S. economy will decrease by 0.7 percent. It will be the first time in the post-World War II period that Japan, Europe and the United States will simultaneously enter recession, the IMF said.

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