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reflections

Feb 16, 2009 | 02:54 GMT

Geopolitical Diary: The G7's Response to the Financial Crisis

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.
Finance ministers from the G7 states — the United Kingdom, Canada, France, Germany, Italy, Japan and the United States — met this weekend to discuss responses to the international financial crisis. Despite calls before the meeting for rapid, coordinated action, the communiqué the organization issued Feb. 14 was short on action points and shorter still on collaboration. The G7 members agreed on a three-point approach to follow in tackling the financial effects of the crisis: Ensure sufficient liquidity to financial markets, strengthen the capital bases of financial institutions, and work to minimize the impact of toxic assets (e.g., subprime mortgage-backed securities) held by financial institutions. On the fiscal side, the G7 stated that its members are committed to stimulus policies that can be accomplished quickly and can balance tax cuts and government spending. It also will prioritize investments that lead to increased future growth and that rely on temporary, fiscally sustainable measures. The most notable aspect of this document is its reliance on states to forge their own solutions to the international financial crisis. Nowhere does the G7 indicate that a solution to the international crisis is to be found in international cooperative solutions — with the exception of a call for more flexibility and resources for the International Monetary Fund. Discussions held in the early days of the financial crisis indicated that the world's developed nations might consider a wholesale revamp of international financial regulations, with increased oversight of financial institutions, but that kind of coordinated action does not appear to be in the cards. Indeed, not only does the financial response from the G7 rely on states to implement their own procedures, it also appears to thoroughly mirror the roughly sketched plan introduced last week by U.S. Treasury Secretary Timothy Geithner. Using the money and authority granted to the Treasury by the U.S. legislature under the Bush administration, that plan involves spending $2 trillion to recapitalize banks, take care of toxic assets and guarantee liquidity in domestic credit markets. Though met with skepticism within the United States due to the lack of details made public so far, Geithner's plan appears to have won over the G7, whose main criticism is that the United States is not moving nearly quickly enough to implement the measures and get its financial sector back on track. On the fiscal side of the G7's statement, there may be more conflict with the U.S. plan. President Barack Obama will sign the $787 billion American Recovery and Reinvestment Act on Tuesday. The plan certainly provides a great deal of spending, much of which could contribute to future growth. However, much of the spending is not expected to take effect until as late as 2010, meaning the timing of the U.S. stimulus package is distinctly at odds with both the G7 statement and many economists around the world. This is not to say that the Obama stimulus plan will not work. With that much spending and tax cuts, and with such a diverse array of objectives, the plan could give the U.S. economy the boost it needs. The delay on much of the spending may simply mean that the effects will be postponed, or drawn out over the next couple of years. What is clear is that while the G7 states (and the rest of the world) are looking to the United States for leadership on this issue, the United States has experienced a convulsion of domestic debate. Obama has burned through an enormous amount of political capital in pushing the stimulus package through Congress. Rather than being a honeymoon, the first few weeks of his presidency have been characterized by enormous dissent. Whether this will make it harder for the administration to move forward on the next batch of serious issues it faces — from the mission in Afghanistan to relations with Russia — remains to be seen.
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