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Market Sense

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Business as usual

Thu, Sep 24 2009, 14:19 GMT
by UniCredit Research

UniCredit Group

A new G20 summit is about to start, and the omens are not good. In contrast to the policymakers’ own exhortations, G20 politics are back to business as usual, with the headline-grabbing debate on financial sector compensation epitomizing the age-old competition between the continental European and the anglo-saxon economic model. This might divert precious attention from other regulatory reforms, but most of all there is something surreal in seeing the eurozone and the US fighting for the throne in the pit of a deep recession, while China is soaring higher at about 8% growth and pulling the rest of Asia with it. This is really missing the big picture. Redressing global imbalances and rebalancing global growth is in my view the most important item on the G20’s agenda—and probably the one where we will see the least concrete progress. The most positive surprise in the recovery so far has been the quick revival of global trade, which has confounded fears of a resurgence of protectionism condemning us to a new Great Depression. To me, this signals that the interconnection of the global real economy has generated some important, self-regulating safeguards—free trade now has its own “vested interests”. Integrated financial markets certainly require better regulation and stronger safeguards, but we have to accept that globalization is here to stay, that it has a selfsustaining dynamics, and that it can be a powerful and precious source of growth. The implication is also that the rebalancing of global growth is already underway, and will gradually intensify, making the existing distribution of voting power in international institutions like the IMF untenable. As such institutions have played a key role in keeping the crisis under control, reforming their governance should be a priority to guarantee their continued relevance.

Late last year and early this year, G20 summits were a matter of life and death for the world economy, and the G20 delivered, albeit not without some heart-stopping hesitations. Now that the crisis has abated and the world economy gives credible signs of picking up, the G20 is back to business as usual. This is somewhat paradoxical, as it happens under the beckoning call of “we cannot get back to business as usual!”. In other words, global policymakers argue strongly that the economic recovery should not weaken the impetus for a deep-reaching overhaul of the global financial infrastructure, to reduce the risk of future crises. This is a laudable intent that nobody can seriously disagree with. The problem is that the preparations to this G20 have signaled a clear return of the business as usual of transatlantic disagreements on the “right” economic model.

A disproportionate amount of attention and political tension is focusing on the issue of compensation in the financial sector. What really worries me here is that financial sector compensation seems to have become the new call to arms for supporters of a more heavily regulated economic system against the supposedly discredited anglosaxon model.

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Published on  Thu, Sep 24 2009, 14:21 GMT