Debt burden quickens power shift as G-8 loses clout

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: The world’s most affluent nations will take decades to work off the biggest buildup in debt since World War II. The political costs may be permanent, laid bare at this week’s Group of Eight summit of leading industrial powers.

Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114% of gross domestic product in 2014, more than triple the 35% of the main emerging economies including China, the International Monetary Fund forecasts.

The run-up in debt has hastened a power shift that is sapping the industrial world’s authority to impose its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they spawned.

The eight-nation forum that starts on Wednesday in L’Aquila, Italy is “a lot less relevant given its makeup and given developments in the world,” French finance minister Christine Lagarde said July 5. “Big players, like emerging economies, India, China or Mexico, are invited, but they’re given only a jump seat outside of the main summit.”

The industrial world is beset by the harshest economic conditions in a lifetime: a projected US budget deficit of 13.6% of GDP in 2009, unmatched since World War II; an annualised 14.2% contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the data were first compiled.

Reflecting the relative fortunes of the G-8 and emerging markets, developing nations’ share of worldwide stock-market capitalization has climbed to a record 24% from 15% at the start of 2007 as investors piled into the fastest-growing economies. “Despite a global economic contraction and some uncertainties over growth in domestic demand, China’s economic recovery will continue,” Zhang Jianhua, head of the central bank’s research bureau, said in this month’s China Finance magazine.

While the surge in borrowing has prompted calls for alternatives to the dollar as a reserve currency, emerging- markets policy makers aren’t near consensus on a plausible option. Chinese deputy foreign minister He Yafei said July 2 the dollar will reign supreme for “many years to come.”