THE G8 summit gathered last week in the French resort of Deauville. Apart from endorsing Barack Obama’s attempt to co-opt the Arab revolutions, it’s not clear what it did.
This reflects the waning significance of the body. It’s supposed to represent the leading industrial economies. But China, which now accounts for a marginally larger proportion of global manufacturing output than the US, isn’t a member.
Hence the rise of the G20, which includes the big economies of the Global South. Its next summit takes place in another French resort, Cannes, in November. It may have a lot to discuss.
A few months ago there was much euphoria caused by claims that the world economy was beginning to power out of the Great Recession.
Now things don’t look so good. Figures released last week showed that the US and British economies are growing very slowly and that the recovery in the eurozone, which had been driven by robust growth in France and Germany, was decelerating fast.
Add Japan, stuck in the doldrums after the Fukushima tsunami, and we see the advanced “core” of the world economy stagnating.
This might not matter so much if the story that has been driving the financial markets upwards—that China, India, Brazil, and the other “emerging market” economies were shoving the US and Europe aside—were true.
Speculative money has been pouring into the big Southern economies.
Much of the excitement on the markets has centred on commodities, whose prices have been pulled up by the fast-growing Chinese economy’s demand for raw materials.
Huge interest centred on the stock market launch of Glencore, the big Swiss-based commodities trader. But last month the markets lurched downwards as the price of oil, copper, silver and other commodities suddenly fell.
No doubt speculation played its part in these gyrations. Gillian Tett, the US editor of the Financial Times newspaper, reports that a recent study found that the prices of many raw materials now rise and fall together.
The explanation may be the huge increase in the amount of money invested in funds that bet on how an index of commodity prices will move. This has risen from $15 billion in 2003 to $200 billion today.
But the “correction” in the commodities market may also reflect worries about China. The infamous Wall Street bank Goldman Sachs is a major source of the hype about “emerging market” economies.
It even invented the concept of the BRICS – Brazil, Russia, India, China, and now South Africa.
Last week Goldman predicted that the Chinese economy would slow sharply between April and June. The growth rate would still be 8 percent—spectacular in the US or Europe, but not fast enough for a Chinese regime that has used headlong economic expansion to maintain political order.
The problem is that the expansion has become too headlong. In 2009 Chinese banks—still controlled by the state—lent an additional $1.4 trillion. This pulled the economy quickly out of recession, but created a new set of problems.
Inflation surged. Rising food prices are squeezing living standards. And a speculative bubble developed as property prices soared. To get inflation under control, the government has pushed up interest rates, in the process slowing the economy down.
Meanwhile, the Western financial system has yet to recover from the collapse of the last bubble in 2007‑8. The eurozone “rescues” were really about saving the French and German banks that had lent heavily to countries such as Greece, Portugal and Spain.
To shore them up, the European Central Bank (ECB) bought huge quantities of these countries’ government bonds.
If they default on their debts, this will wipe out much of the ECB’s capital, dragging one of the world’s main central banks into the black hole of the financial crisis.
All in all, the masters of global capitalism have a lot to worry about. It makes one wonder why there is such a tussle for the poisoned chalice of Dominique Strauss-Kahn’s job as manager of the International Monetary Fund.