The summit in L'Aquila was supposed to be so different. Far from setting the scene for economic recovery, the outlook is still bleak
It all looked so different a month ago. Then, with stock markets roaring back and the portents for growth looking stronger by the day, there was some hope that it would be business as usual when the G8 met this week.
The script for the west's leaders was supposed to go like this. Yes, we have all suffered from the most severe financial crisis since the 1930s. Yes, all our economies plunged into deep recession late last year. But now things are on the up. First we took emergency action to bail out the banks. Then we stepped in to boost our own individual economies through lower interest rates and higher borrowing. Finally, we clubbed together at the G20 meeting in London in April to put together a $1.1tn fund to help fragile emerging countries – especially those in eastern Europe – weather the storm. As the second anniversary of the crisis nears, it is now clear that things are getting better.
The mood in L'Aquila this week, though, is rather less bullish. And rightly so. As the International Monetary Fund noted earlier this year, the most severe crises are those that involve banks, those that affect the US and those that have a broad geographical spread. This one has all three, and it was always ridiculous to imagine that the recovery would be quick and easy.
That's not to decry the efforts of world leaders. Gordon Brown's initiative to rescue the banks last October avoided the doomsday scenario and was widely copied. Without cheap money the slump would have been even deeper. But all that has been achieved so far is a slowdown in the rate of economic decline. Real recovery remains some way off.
Why is that? First, there is a shortage of demand. The recent figures for manufacturing output from around the world have been less dreadful than they were in late 2008 and early 2009, when they mirrored the contraction seen in the early 1930s, but the improvement is the result of companies starting to rebuild stocks of goods run down when orders dropped off a cliff in the winter.
A genuine improvement in manufacturing output requires consumers to spend more and companies to invest more. With unemployment rising and real incomes squeezed there is scant chance of that happening. Consumers are hoarding their cash, companies are mothballing investment plans.
Second, the financial system remains seriously impaired. Sure, market conditions have improved, but many of the institutions that provided credit during the boom years are no longer open for business. Banks are building up their capital by playing hardball with their customers. That makes sense for each bank individually; for the economy as a whole it presents a real problem.
Finally, the premature hopes of recovery have led to higher oil prices and pushed up long-term interest rates – neither of which is welcome for a global economy still on life support.
What does this all mean? It means that Brown is right to warn against complacency. It means that share prices look vulnerable. It means that protectionist pressures are likely to rise as the social costs of the downturn intensify. What's more, there's not an awful lot the G8 can do about it. They have used up nearly all their bullets.
Copyright Speakers Corner 2016