16 November 2008

Not hitting the G20 spot~ Telegraph

Current events will shape not only our immediate financial prospects, but the global economy for decades to come. British politics, too, is in flux - as Brown tries to win on the world stage the popularity that's eluded him back home.

Historians in the future will try to unravel how the Western economies imploded in 2008, and a new world order emerged. But what strikes me for now, as the summit media coverage hits fever pitch, is that we're being sold four distinct myths.

This summit isn't a "New Bretton Woods". References to the 1944 conference at a New Hampshire hotel are now dime-a-dozen. Back then, during a fortnight of intense deal-making and after years of preparation, global leaders hammered out a series of detailed currency and regulatory agreements - a template for the post-war world.

This weekend's effort has been cobbled together by a deeply unpopular out-going US president. After all the photo ops and media briefings, there'll be just a few hours of talks.

Bretton Woods "worked" because of US leadership. This time, the real US president isn't there. It's almost as if this summit - wedged between Barack Obama's election and his taking of office - has been scheduled to make it as ineffective as possible, to avoid any real decisions.

The second myth is that the International Monetary Fund can re-emerge as an institution responsible for "global economic surveillance". This idea - repeated ad nauseam by Brown - lacks all credibility.

The IMF is broke - controlling barely 3pc of total world reserves. It is also politically reviled. For years, it imposed policies on developing countries that were not only seriously damaging, but had more to do with promoting Western business interests than economic stability.

Many of those developing countries have now matured into leading economic powers. They complain - rightly - the Fund remains US-controlled. The idea that such countries would listen to the IMF, let alone refill its coffers with cash that will be used to bail out Western countries, is laughable.

Such notions still fuel the third myth - that the West is still in charge. We're not. Getting out of the current crisis requires governments to stand behind massively over-exposed Western banks - providing credible financial backing as some collapse, others prevail and the global banking system reconfigures.

That takes deep, deep reserves, and after years of profligacy, the Western coffers are bare. Excluding Japan, the G7 controls only 7pc of total global reserves. The Bric countries - the large emerging markets of Brazil, Russia, India and China - have 45pc.

Six months ago, China's total reserves were worth less than the market value of the US banking system. Now they're worth more than twice as much - a stark illustration, if any were needed, of how much the world has changed.

Yet Western powers have only convened the G20 group - including the Brics, Saudi Arabia and other large emerging markets - under huge duress. And nothing about the structure or tone
of this summit suggest the G7 - with its large budget deficits, barely functioning banking system and paltry reserves - is willing to acknowledge today's realities.

The fourth myth we're being sold is built on the other three. As a Western leader and former IMF officer-holder, our Prime Minister has appointed himself the champion of this summit. His conduct is diminishing the UK's status as a leading nation.

Brown's claim that he convinced China to launch its recent fiscal stimulus package is preposterous. Having constantly opposed calls from Germany and many Asian countries for tighter bank controls, he's now causing irritation by arguing he mooted such reforms first.

But the main reason the Prime Minister's posturing looks so odd, and is counter-productive, is that the economy he has run for the last decade is among the weakest of any represented at the summit.

The Government could end up borrowing £100bn this year - compared with the official £43bn estimate. Next year, borrowing could hit £150bn - a whopping 10pc of GDP.

Brown says it's "a fact" that our national debt has fallen from 44pc of GDP to 37pc at the latest count. The really scary thing is he believes his own hype. Add Northern Rock and the Private Finance Initiative, and we're looking at 46pc of GDP. Public sector pension liabilities account for another 50pc on top of that.

Brown is running around Washington claiming the UK's is a low-debt economy that can lead the world in launching a global "Keynesian" boost. Unaffected by such hubris, the world's currency markets are now casting their judgment.

Since our Prime Minister starting talking about "fiscal rescues" and "lower interest rates", the pound has taken a battering. Sterling yesterday slipped to a six-year low against the dollar, its weakest ever rate against the euro, and a 13-year low against a trade-weighted basket of currencies.

George Osborne is right. We are at risk of a run on sterling. The markets will eventually stop buying the UK government's debt. A gilts strike is a real possibility. Some of us have been stressing these dangers for months. Had the shadow chancellor done the same, rather than waiting until the eve of this summit, he'd now be less vulnerable to the charge that he's just playing politics.

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