THE WORLD Economic Forum at Davos fulfilled a genuinely useful international function by focusing attention on protectionism as a major risk for the global economy. This gathering, dominated in recent years by the bankers and investors whose profligacy made them primarily responsible for this crisis, on this occasion gave its main platform to political and economic leaders having to pick up the pieces and trying to put the system together again. Their warnings about the perils involved if they fail and measures necessary to prevent that happening deserve a wide hearing, even if they were inconclusive and as yet ill-defined.
The sheer pace of events over the last five months, as the credit crunch was rapidly succeeded by banking collapses, recapitalisations and then spiralling recession in major economies has obscured the cumulative costs of state intervention throughout the world. Savings and debts have to balance out eventually. There is now growing international competition for surplus capital to fund massive public investments and increasing pressure to protect industries made vulnerable by sharply falling demand and unbalanced exchange rates. The possible conjunction of such trends this year would make the crisis deeper still.
Several of the major elements involved were highlighted at Davos. German chancellor Angela Merkel called for a new economic council at the United Nations, alongside the security council, to coordinate international action. Other leaders concentrated on the meeting of the new Group of 20 major economies in April to chart a way forward. Such institutional redesign will, however, take time and much of the work will have to be done through existing channels.
A lot will depend on how the new United States administration chooses to work with other states and regional organisations like the European Union. A crucial element will be its need to finance its yawning budgetary deficit and huge stimulus package without starving the rest of the world of equally needed funds. Alongside that there are worrying clauses in that package about buying American goods only. They are echoed in the growing number of social protests in Europe and elsewhere about who should bear the costs of fixing the recession.
Chinese premier Wen Jiabao’s warning that inappropriate and unsustainable macroeconomic policies with prolonged low savings, high consumption and excessive profit-driven expansion produced the crisis was a thinly veiled criticism of the US. His willingness nevertheless to negotiate on keeping trade and investment open despite the Obama administration’s complaint that China is manipulating its exchange rate is welcome. This commitment to keep markets open should be vigorously supported by Europe. It remains to be seen whether there is the will and resources in the middle of this recession to complete the Doha trade round that would help alleviate protectionist trends. Ireland, as one of the most open economies, has a great deal at stake in these negotiations. If they are not properly addressed our domestic measures to manage the crisis would lack wings to fly.