The G20 countries meet each year. Normally their meetings are full of fine words resulting in little action. But at a summit in London on 2 April 2009, the fear of a deepening global recession focused minds and a package of measures worth over $1 trillion was agreed to stimulate trade and growth. This included $750 billion for the IMF to help economies in severe difficulties, $250 billion for financing world trade and $100 to multilateral development banks (such as the Asian Development Bank) to provide extra aid to the poorest countries.
The extra money for the IMF would include $500 billion of loans from member countries and £250 billion in new money – a form of international quantitative easing. This new money would be in the form of ‘special drawing rights’. These are denominated in dollars and are created by the IMF to be drawn on by countries in difficulties.
There was also agreement to tighten financial regulation and to resist protectionism. A ‘Financial Stability Board’ would be set up and work with the IMF to design a strengthened regulatory system for banks and other financial institutions and for financial markets and instruments.
The following articles look at the agreement and its likely effects.
‘This is the day the world came together to fight back’ Independent (2/4/09)
G20 communiqué: Point by point analysis Telegraph (2/4/09)
G20 summit – leaders’ statement. Full text of the communiqué Guardian (2/4/09)
G20: Economic summit snapshot BBC News Online (2/4/09)
G20 leaders seal $1tn global deal BBC News Online (2/4/09)
G-force The Economist (2/4/09)
World leaders declare war on risk Sydney Morning Herald (3/4/09)
Postscript (Sept 2009)
G20: What progress has been made? BBC News (23/9/09)
G20: Pledge by pledge BBC News (25/9/09)
- What will determine the success or failure of the G20 agreement to revive the world economy?
- Identify any multiplier effects from the agreed measures.
- Why did the French and German governments object to any further fiscal stimulus packages?
Peer Steinbrück, the German finance minister, has ridiculed the UK’s VAT cut and accused Gordon Brown of ‘crass Keynesianism’ in cutting VAT by 2.5 percentage points. He argued that the fiscal stimulus will raise the level of UK public debt to such an extent that it will take a generation to pay off. Gordon Brown has dismissed the attack as ‘internal German politics’, a stance that was given some credibility when Angela Merkel threw her weight behind a €200bn Europe-wide fiscal stimulus plan, seeming thereby to contradict the views of her own finance minister.
Brown’s VAT cut just crass Keynesianism, say Germans Guardian (11/12/08)
Germany attacks ‘depressing’ UK economic rescue Times Online (11/12/08)
Brown hits back at German criticism of his economic rescue plan ahead of summit Times Online (11/12/08)
Angela Merkel plays Scrooge. Thank goodness Times Online (11/12/08)
Angela Merkel throws weight behind Brown’s fiscal stimulus approach Guardian (11/12/08)
- Why may the boost to aggregate demand from the fiscal measures announced in the pre-Budget report be less than the Chancellor hoped?
- What would be the effect on the budget deficit if the Chancellor had given no fiscal boost to the economy and the recession, as a result, was deeper?
- Can Keynesianism ever be “crass”?
- How would you design a fiscal policy for maximum impact in combatting a recession?
The global financial crisis has led to a significant number of countries going into recession. Recession is defined by economists as two successive quarters of negative economic growth. Banking collapses and a collapse in consumer confidence, and therefore expenditure, have reduced aggregate demand. This situation has been exacerbated as each country’s exports fall due to the slowdown in other countries. The combination of these and other factors has led to negative economic growth resulting in recession. We have linked below to a range of news articles looking at different countries that have fallen into recession in recent months.
German economy now in recession BBC News Online (13/11/08)
Germany tumbles into recession as exports dive Times Online (13/11/08)
Germany slides into recession Guardian (13/11/08)
Threat of worst postwar slump grows as major economies enter recession Times Online (14/11/08)
Eurozone officially in recession BBC News Online (14/11/08)
Eurozone tumbles into first-ever recession Times Online (14/11/08)
Spain has that shrinking feeling as economy heads south Times Online (20/11/08)
Economic clouds gather as Spain faces recession Times Online (6/12/08)
Japanese economy now in recession BBC News Online (17/11/08)
Global slowdown and resurgent yen finally drag Japan into recession Times Online (18/11/08)
Japan in sharpest plunge to recession since war Times Online (28/11/08)
Japan slides into recession as global slowdown hits exports Guardian (17/11/08)
Singapore officially in recession BBC News Online (21/11/08)
Hong Kong slides into recession BBC News Online (14/11/08)
- Choose one of the countries above and analyse the principal reasons why it went into recession.
- Discuss whether a fiscal policy or a monetary policy stimulus will be more effective at boosting aggregate demand in a country that is in recession.
- Assess policies that the governments of the countries above could use to minimise the impact of recession on the level of employment in their country.
The Chancellor’s pre-Budget report was a massive political and economic gamble. The government has clearly recognised the potential seriousness of the economic situation and, in an attempt to avoid a prolonged recession, has injected £21bn into the UK economy in the form of tax cuts and spending increases. The headline grabbing changes were a cut in VAT and an increase in the top rate of income tax to 45% for those earning over £150,000 per year, but there was a raft of other changes including £3bn of public-sector infrastructure projects being brought forward.
Will this fiscal kick be enough to prevent a deep recession? The Chancellor clearly thinks so. He has amended his forecasts for economic growth to acknowledge that GDP will fall by 1% in 2009, but he believes growth will bounce back to 1.75% in 2010. The links below are to a selection of articles relating to the pre-Budget report, but there are plenty of other sites offering discussion and analysis of the issues relating to this unprecendented Keynesian fiscal boost.
Pre-Budget Report: Alistair Darling’s £1 trillion debt gamble Times Online (25/11/08)
Pre-budget report 2008 Guardian (25/11/08)
Pre-Budget report 2008 BBC News Online (25/11/08)
Average earners lose out in PBR BBC News Online (25/11/08)
Pre-Budget Report – the documents BBC News Online (25/11/08) Links to all pre-budget report documents as pdf files
Robinson and Peston analysis of PBR BBC News Online (25/11/08) Video from the Daily Politics show
Darling needs to cure a nation hooked on debt Guardian (24/11/08)
Darling unveils borrowing gamble BBC News Online (24/11/08)
Analysis: is this the death of New Labour? Times Online (24/11/08)
Alistair Darling announces £20bn economic boost Times Online (24/11/08)
Alistair Darling’s £20bn tax giveaway Times Online (24/11/08)
The mother of all gambles Guardian (24/11/08)
Obama and Darling: compare and contrast Guardian (24/11/08) Video comparing the packages announced by Alistair Darling and Barack Obama
The £21bn tax gamble Guardian (25/11/08)
Call this a cure? Guardian (25/11/08)
- Write a short paragraph outlining the main policies set out in the pre-Budget report.
- Evaluate the likely success of the policies announced in the pre-Budget report in preventing a prolonged recession for the UK economy.
- Discuss the short-term and long-term impact on the UK money markets of the high levels of borrowing required to fund the tax and spending changes set out in the 2008 pre-Budget report.
- Assess the likely impact of the increase in the top tax rate of income tax to 45% on (i) consumer expenditure growth, (ii) tax revenues, and (iii) the incentive for higher rate tax payers to work harder.
- Discuss whether a fiscal solution, such as that set out in the pre-budget report, or a monetary policy solution will be more effective at preventing a prolonged recession in the UK..
The G20 Leaders Summit on Financial Markets and the World Economy took place on November 14–15, 2008, in Washington DC. Many commentators dubbed this meeting ‘Bretton Woods II’. Bretton Woods – Mark I was a meeting in the summer of 1944 that set out the foundations for the post World War II economic order. It set up a system of semi-fixed exchange rates and led to the establishment of the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). Bretton Woods Mark II was perhaps less historically significant, but the world leaders agreed a plan to boost the world economy through tax cuts, higher public expenditure and lower interest rates; something Lord Keynes, the principal negotiator for the UK at Bretton Woods Mark I, would have wholeheartedly approved of!
G20 to back global tax cuts Times Online (16/11/08)
This week, our leaders have a chance to make the world anew Guardian (9/11/08)
A dangerous free-for-all Guardian (11/11/08)
Bretton Woods II – five key points on the road to a new global financial deal Guardian (14/11/08)
G20 summit: ‘The world economy is broken and they need to reflate’ Guardian (14/11/08) Podcast
Doubts raised over prospects of success for ‘hasty summit’ Guardian (15/11/08)
Our chance for a working regulatory regime Guardian (15/11/08)
- Write a short paragraph summarising the outcomes of Bretton Woods II.
- Assess the extent to which the fiscal and monetary stimulus agreed by the G20 leaders will be successful at minimising the depth of the global recession.
- Discuss the need for regulatory reform of the world financial system (as considered at Bretton Woods II).
- The G20 “signalled a determination to press on with the completion of the Doha world trade round”. Assess the extent towhich this is likely to be successful.