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The G8: Searching for Direction

May 20, 2011 12:50 PM ET
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The G8 have long been considered a sounding board for ideas, rather than an economic action forum. Next week’s G8 meeting in the French seaside resort of Deauville on May 26-27 is unlikely to be treated any differently. The global banking crisis placed the focus squarely on global imbalances, and forced economic realism over the political status quo to the effect of shifting the balance of power (and significance for the markets) from the G8 on the G20. Yet, it was in the G8’s financial markets and that the crisis was born and it was the G8 that mounted the multi-billion response to combat its effects on the highly interrelated global economy. It is also in the G8 that the current epicenter of global systemic risk is bread in the form of the demise of AAA and rising public debt sustainability concerns. In this respect, the G20 have been largely a “price-taker” – as opposed to a policy setter - via appreciating domestic currencies, rallying local financial assets and inflated global commodity prices. Finally, as the haste around finding a European replacement for the IMF top job this week shows, it is still the G8 who largely control the direction of global public capital.

Remarkably, in spite of the drive to find a truly international response to the global challenges posed by the financial crisis – excessive leverage and financial regulation - the dynamics of the G8 as a working group have been remarkably volatile over the past four years. The G8 have tended to unite in the face of extreme economic risks, most recently following the March disaster in Japan, by organising co-ordinated intervetion to weaken the yen. The aftermath of the financial crisis, however, has tended to polarize national positions and challenge the cohesion of international policy forums, not just within the EU. The dual fiscal crisis on both sides of the Atlantic has so far done little to bring the US and European positions closer. While the US political impasse over the debt level has contributed little to confidence among the rest of the G8, the EU political paralysis with respect its own sovereign debt crisis has triggered US concern and calls for rapid action. Looking back on this meeting over the years to come, a US-European standoff on the impending debt crisis might just prove to be the biggest risk at a time when public sector explicit and implicit liabilities in the world’s two largest capital markets are piling up to unsustainable levels.

Ultimately, it is the G8 political risk, rather than economic decisions, that will prove significant for the markets this week. Hence, it is the US and European comments on the sidelines, surrounding the heated closed door debates, rather than the G8’s consensus communication that will provide the clues for investors over the coming days.

Lena Komileva

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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