The recently concluded G-20 meeting is hailed as a moderate success in many quarters partly because prior expectations were very minimal. While a global economic crisis mandates cooperation, it also ends up amplifying conflicts among the nations, which may prevent the countries from building up a consensus on policies needed for recovery and also put up barriers to the formation of a durable coalition among the nations. As one may recall, just prior to the meeting, France and Germany had threatened to walk out over reforms in financial sectors while China had suggested the replacement of dollar by an alternative vehicle of international transaction.

Still, in order to tackle global economic problems, countries need to resolve their disagreements and must address three key thorny issues. The first issue relates to the extent and magnitude of reforms and regulations in the financial sector. It is clear that while US still prefers a light touch regulation, Germany and France want to go back from the era of mass scale securitization to the age of narrow banking. The reason is simple. Many of the sophisticated financial products (like CDS etc.) are brainchilds of investment bankers based in London and New York. In 2007, the number of people directly employed by the financial services sector in UK was 350,000 and the figure was even much higher in USA. The Ccrrent crisis has already taken a toll on these numbers and imminent regulation is certainly expected to downsize this sector further. However, severe measures, demanded by the Germans and French prior to the G-20 meeting, will certainly lead to further job losses in the financial sector and it is natural that US and UK have resisted the concept of draconian regulation. The Europeans, with smaller sized financial sectors, reaped none of the benfits but incurred the downside of high finance. The question of international regulatory arbitrage in the financial sector will, however, sooner or later appear on the table and so a consensus needs to develop in this area.

The second source of major conflict is related to the financing of the stimulus package to be followed in US and UK. The Europeans fear that part of this huge stimulus in the US will be monetised and may lead to an inflation leading to a further depreciation of the dollar to Euro, which will hurt Europe?s exports to US and would have adverse consequences on their economy. In addition, ECB, consisting of 17 member countries, will have less flexibility compared to either Washington or Bank of England with regard to monetary policy. The Anglo-Saxons have an advantage due to sovereignty of their central banks as opposed to ECB. The latter, while formulating a competitive monetary policy, has to take into account consequences in the Euro Zone as well and thus is constrained to some extent.

Third, China, with a huge amount of dollar reserves accumulated in the past by its lop-sided exchange rate policy and surplus, had bought US bonds on a massive scale?the country was lending money to US to finance its deficit in return for a future interest rate. However, similar fear of US inflation in the future have already made China jittery and in response, the country has sold $34 billion worth of US treasury bonds in the first two months of the current year. The conflict between US and China will sharpen in the future unless its fear of US inflation subsides.

The countries, instead of addressing these issues, chose to pay attention to other issues where there were no direct conflicts. The summit did a good job through the provision of $250 billion for trade credit to boost world trade. This was necessary to help exporters who fear rise in defaults in payments due to the world recession. Lending to countries struggling in these bad times?an amount of $500 billion through IMF and another $100 billion to poorer countries via International Development Banks?will certainly act as a cushion and help at least a partial recovery. While these measures are welcome they are not a substitute to addressing the thornier issues.

?The author is reader in finance at the University of Essex