The Group of 20 Egoists

Yesterday G7, tomorrow G20: nations struggle against protectionism on several fronts – and against their own seducibility.

Tim Geithner stands before a heavy white door leading to the ballroom of the Hotel Excelsior in Rome. The new secretary of the treasury intends to explain to the world where the United States stands. It’s his first international appearance and, of all things, the microphones pick this moment to quit working. The G7 summit had just ended where Geithner had spent two days with his industrialized nation counterparts, explaining America’s bank bailout plan and where he also spoke with German Finance Minister Peer Steinbrück about protectionism. The German government are worried that Americans may close their markets because their economic recovery plan gives preference to domestic companies.

Geithner’s predecessor, the brawny Wall Street veteran Henry Paulson, would have had the room decorated with over-sized American flags and would have stormed into the hall, read a prepared statement, taken a couple of questions from pre-selected American journalists, and promptly disappeared. Instead, the hall was decorated with the flags of the G7 nations. When the audio difficulties were finally fixed, the doors were opened to the slightly built career bureaucrat Tim Geithner. He spent some time at the dais, looking over the audience as if he wanted to make sure he was welcome there. When he answered questions, he looked directly into the questioner’s eyes. He expanded on his answers whenever he seemed skeptical and appeared relieved when the questioner nodded in agreement with him.

Mr. Geithner, are Americans trying to protect their markets?

“We’re aware of those concerns and President Obama has addressed them. We will keep our borders open.”

Geithner’s reticence underlines his message: America is listening again and it needs its partners. That’s the message being imparted to the world. And the world takes notice of such things these days. It should shed light on whether nations want to cooperate or go their separate ways. It may sound obvious, but the economic vitality of nations depends on it. History shows that protectionism leads to economic ruin.

Example: the summer of 1931. On July 8th, head of the Danatbank – at that time one of Germany’s largest financial institutions – conferred with Hans Luther, President of the Reichsbank. Danatbank was virtually insolvent due to the heavy war reparations Germany was forced to pay after WWI. Luther traveled to Paris and London looking for the one billion dollar credit he needed to stabilize the Danatbank and he hoped his British colleague Montagu Norman could oblige. But Luther was rebuffed; Great Britain itself had serious financial problems. France wanted to attach too many unrealistic political conditions to a possible loan and the United States simply didn’t want to get involved in European affairs. On July 13th, Danatbank’s vault closed and lines formed in front of its branches. The economic crisis had hit Germany.

During the following years, international cooperation on the crisis didn’t materialize. To support their own economies, many countries devalued their currencies and set up trade barriers. The aim was to gain an advantage by protecting their own companies and protect them from foreign competition. Despite this, everyone’s economy suffered.

For the architects of the post-war world, the lack of international cooperation became the main reason for the depression of the 1930s – and the political radicalization of the age. They set up an entire network of institutions and forums designed to encourage nations to work with rather than against one another. The reasoning behind the idea was that free trade would result in a global prosperity heretofore unknown. They would be the safety nets for the world economy and would also ensure peace. They would make team players out of individuals based on the participants’ own free will. No other way was possible, because sovereign nations couldn’t be forced to do anything to which they objected.

On Sunday, one week after the G7 summit in Rome, Chancellor Angela Merkel meets in Berlin with the heads of state from Great Britain, Italy, France, Spain and the Netherlands to work out a common European position on combating the crisis. Shortly thereafter, the leading industrialized nations of the G20 meet in London to agree on new world finance policies. And a few weeks after that, the members of the International Monetary Fund (IMF) that oversees international financial stability meet in Washington.

In economic theory, it’s clear what must be decided at these summits: overly-indebted countries like the United States and Great Britain must ensure that they will enact money saving policies to get their financial houses in order; economically sound countries like Germany Japan and China must increase spending in order to offset the resulting decrease in global demand. The banking system must be cleaned up and regulated to ensure the global flow of funds, and nations that stumble into trouble will be helped, because in these days of global markets, countries are dependent on one another; in good years they all prosper and in bad years they all suffer. That’s why German exports are currently suffering: the American consumer has gone on strike. And that’s also why Iceland’s bankruptcy is tearing holes in the balance sheets of German financial institutions.

In practice, however, it looks different: Finance Minister Peer Steinbrück brought no new economic stimulus package with him to Rome; he wanted to discuss with his colleagues how best to get government out of the economic sector. China wants to take part in international talks but isn’t yet prepared to take active part in expensive rescue plans. France demands the automobile industry close their factories in Eastern Europe. The United States weakened the protectionist clauses in their stimulus package, but they haven’t done away with them completely. Great Britain suggests their banks will primarily serve their domestic markets. That could destabilize entire regions whose banks are in foreign hands as is the case with Eastern Europe. Other nations would be sucked into the chasm as well if Eastern Europe gets into financial difficulties. Financial Times Great Britain called the G7’s performance “pathetic.”

Perhaps the reason for that is that everyday politics doesn’t play out in luxury Roman hotels, but in election precincts, parliaments and party congresses. There, people aren’t occupied with saving the world but with their own backyards or perhaps the next election. That is where governments have to fight battles with people like Walter Hirche. Hirche is a member of the Free Democratic Party (FDP) in Lower Saxony. When Lower Saxony can’t agree on an economic stimulus package, it may not become national law because without the FDP, Germany’s coalition government doesn’t have enough votes in parliament. And Hirche will only agree if the government takes note of a few wishes the FDP has.

Basically, international economic relations are a lot like being in a sports stadium. If one person stands, he sees more. If everyone stands, his advantage has been taken away. In fact, everyone is inconvenienced because they all have to stand. When Steinbrück and Geithner return home after the summit, they’ll be met with a crowd of representatives and party strategists who would really like to see if it wouldn’t work if they just stood up. Those who don’t want to see tax money that could be used to bail out domestic banks and the economy flow overseas.

For that reason, bureaucrats in the capital cities argue for weeks about the closing statements coming from a summit meeting. What would be acceptable at home? What drives a country to international isolationism? The British, for example, oppose strict regulation of financial markets because they want to protect London, the word’s financial capital. The Germans want to avoid anything that might obligate them to make new injections of money into the economy. It’s already a sore point with Germans that the British are referring to the upcoming G20 meeting in London as a “summit for growth, stability and employment” and aren’t restricting it to problems in financial markets. It’s a tedious balance between global and national interests.

Many experts have become desperate about it. “If we continue this way, a global depression is really possible,” says London Professor of Economics Willem Buiter. Anyone speaking with officials of the large industrialized nations these days also gets a fairly blunt assessment of the situation. Even in the highest offices of government and the central banks, scenarios are making the rounds in which national bankruptcy and growing nationalism are the subjects. They talk of a possible collapse of the European Union and other post-war institutions, even the possibility of riots and armed conflict.

Perhaps it’s this knowledge of the disastrous consequences of going it alone, especially for one’s own country, which has so far kept countries from surrendering to these domestic political pressures. “If we could actually rehabilitate ourselves at someone else’s expense we would do so, of course. Everybody thinks of himself first. But we know what’s at risk here,” said a G7 representative.

Therefore, despite all arguments to the contrary, most markets are still free and open. In Rome, Japan made $100 billion available to the IMF for aiding nations in economic emergency. Up to now, Steinbrück has thus far avoided making a concrete commitment, but if push comes to shove Germany will also aid other countries, even members of the Eurozone like Greece. At least that’s the word out of Berlin. Central banks are already aiding one another. The Federal Reserve in Washington, for example, is supplying dollars to Mexico, Brazil and Korea. And preparations for the world financial summit, after early problems were overcome, are steadily progressing despite Great Britain’s resistance. That’s because Geithner, in the final analysis, wants to cooperate with the Europeans. Even sharper controls on hedge funds are imaginable in Washington these days.

The world hasn’t quite gotten to the point of 1931 yet.