G-7 vows to reverse slump, fails to say how

Bloomberg

Group of Seven finance chiefs vowed to tackle a "severe" economic downturn that will persist for most of 2009 without spelling out new steps to do so.

The G-7’s finance ministers and central bankers said in a statement released after talks in Rome Saturday that they were working to restore confidence in markets and revive the world economy. They predicted the full effect of individual rescue packages will "build over time."

"We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector," the statement said. "The stabilization of the global economy and financial markets remains our highest priority."

With the worst global slump since World War II battering state finances, International Monetary Fund Managing Director Dominique Strauss-Kahn said he expects more countries to need emergency aid. That’s putting governments and central banks under greater pressure to end the malaise. U.S. Treasury Secretary Timothy Geithner urged initiatives that are "forceful and sustained for a period that matches the likely duration of the crisis" and noted a "a much greater scale of urgency and commitment" within the G-7.

What is to be done?

The authorities are still at a loss on the best course of action 18 months after the credit crisis broke out. That’s left them pursuing a disjointed approach as the global economy deteriorates further and companies from Microsoft to Nissan Motor cut jobs. U.S. stocks fell the most last week since November, extending the Dow Jones Industrial Average index’s decline since the start of the year to 11 percent.

"The statement ticks all the right boxes, but as expected does not go beyond generic statements of principle and commitments that we have heard before," said Marco Annunziata, chief economist at Unicredit MIB in London. "The commitment to act in a coordinated way flies in the face of the rather uncoordinated approach that followed similar commitments last October."

Geithner, a former Treasury undersecretary in the Clinton administration, returned to the G-7 stage after a week in which investors complained his $2 trillion plan to revive lending lacked detail. His colleagues Saturday urged him to push ahead.

"On paper it looks great," said French Finance Minister Christine Lagarde. "The essential thing is now to implement it."

"It is a comprehensive plan, the intent is there, the will is there," Bank of Canada Governor Mark Carney told reporters. "The question is implementation and execution."

The G-7 called the steps its members have taken to fight the turmoil "exceptional," noting they ranged from spurring liquidity in markets and bolstering capital in banks to slashing interest rates and easing fiscal policy.

Amid signs some are attempting to shield domestic companies and workers from the fallout, the G-7 said it "remains committed to avoiding protectionist measures, which risks exacerbating the downturn."

A $787 billion package of tax cuts and spending increases passed by the U.S. Congress encourages companies to "Buy American." France is demanding carmakers keep production at home in return for aid. "We must be vigilant on creeping protectionism whether it is intentional or unintentional," U.K. Chancellor of the Exchequer Alistair Darling said.

Tempering criticism

G-7 officials tempered past criticisms of Chinese currency policy, saying they welcomed the country’s bid to invigorate its economy. The nation’s commitment to a more flexible yuan should lead "to continued appreciation" in the exchange rate. Geithner, who last month accused China of "manipulating" its currency, also welcomed China’s efforts.

"The G-7 has realized that China needs to be brought into the fold of the global financial system rather than be treated as a pariah," said Geoffrey Yu, a London-based foreign-exchange strategist at UBS in London. "This statement will be welcomed in Beijing and help defuse the recent tension between China and the U.S."

The G-7 oversees about two-thirds of the world economy and is composed of the U.S., Japan, Germany, Britain, Italy, Canada and France.