World leaders fiddle as global economy (and Amazon) burns
Leaders of the Group of Seven (G7), comprising the world's largest economies, met for three days in Biarritz, France on August 24-26 but failed to address any of the important global issues including climate change, trade war(s), the looming economic slowdown, etc. It has been reported that the French government spent over 40 million euros to provide security for the summit. Ironically, the summit could offer only USD 22 million to Brazil to fight the Amazon fires, which the latter promptly rejected.
As we head into the last few months of 2019, the world economy is in distress and political leaders, central bankers, and economists are scratching their heads to come up with policies to stave off a recession. On the environmental front, the fires burning in the Amazon rainforest in Brazil have drawn global attention, with France and Germany threatening to scuttle a trade deal between EU and South America unless Brazil puts out the fire, so to speak. And the trade war goes on and on with both China and the US threatening to escalate the tit-for-tat spectacle unless the other backs down!
One cannot fault President Emmanuel Macron, the host, for trying. While he has failed to highlight the economic crisis, he did cry out—"We're facing a historic challenge to the world order"—on the eve of the summit to grab the attention of his fellow summiteers.
Macron urged the G7 to lead the summit discussions with the 2019 Amazon wildfires, which he described as an international crisis. "Our house is burning. Literally," Macron said, adding that the Amazon rainforest produces "20 percent of the world's oxygen." Some of the countries attending have said they would block a trade deal between the European Union and Brazil's economic and political bloc unless the country takes action.
US President Donald Trump, on the other hand, offered to take the position of the Brazilian government to the meeting and said that the US government would not agree to discuss the issue without Brazil's presence. The United Kingdom, Italy, Japan, Spain and Chile also supported Brazil.
The G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) are not alone in applying pressure on the Brazilian government when it comes to responding to the Amazon fires; political leaders, civil society leaders and celebrities around the world have called for an end to the destruction of the forest, which contains at least 10 percent of the planet's biodiversity.
The G7 leaders also missed a golden opportunity to come to terms with the uncertainty in the world economy and commerce that the trade war and other circumstances have created. The central banks in the US and EU are lowering their interest rates in anticipation of the predicted economic slowdown. The prospect of a no-deal Brexit, rising tensions in Hong Kong, and volatility in the global financial markets have not helped in creating a stable environment necessary for poverty alleviation and Sustainable Development Goals (SDGs). One can only hope that the upcoming UN General Assembly meetings in New York will be able to refocus global attention on the urgent economic and social priorities.
It is time for the world leaders to get together and reaffirm their commitment to SDGs and send a clear signal to the US and China to take into account the damage that their squabble has created and what a recession might bring for the rest of the world. During the last global economic slowdown in 2007-2010, millions of jobs were lost, both in advanced economies and the developing countries. Central bank leaders are worried that, unlike the last time, a future recession will be difficult to pull out of. Interest rates in both the US and EU are already low. In their recent meeting in Jackson Hole, Wyoming, USA, they voiced their grave concern regarding the deleterious effects of the year-long trade war and currency manipulation. Jerome Powell, the chairman of the Federal Reserve System of the US, cautioned that the Fed's tools aren't well suited to counter rising business and investor anxieties over the intensifying trade war between Trump and Xi Jinping.
Stephen Mihm of Bloomberg News writes, "As more countries that aren't part of the original dispute become collateral damage in this conflict, (one can) expect central banks to protect themselves. As some currencies slide more than others, some countries may use tariffs to level the playing field."
To make things worse, the US has engaged in a mini-war with its European partners. It is blaming the other G7 countries, including China, for fuelling the economic slowdown due to lack of economic growth in their respective countries. According to Lawrence Kudlow, director of the White House's National Economic Council, "the US has created 6.2 million jobs which is more than five times the average of the other G-7 economies. While the US economy grew at 2.6 percent, the G-7 countries grew at 1.5 percent."
Fortunately, there are saner voices that might prevail and calm things down and grapple with the economic distress signals coming from the global theatre. The US Fed's chief cautioned the Trump administration that the trade war was aggravating the global economic slowdown, which not only is harming China but has also weakened US manufacturing and business investment. Dr Stanley Fischer, former Fed vice-president and deputy managing director of IMF, was very outspoken at the Jackson Hole meeting and warned that President Trump's behaviour posed a threat to the international monetary system and that he was "trying to destroy the global trading system."
While Macron might be in trouble in his own country with the year-long "yellow vest" movement, he is playing a powerful role in global environmental movement and his office accused Brazil's leader of lying about his country's efforts to protect the environment. The Amazon, 60 percent of which is in Brazil, is the world's largest tropical rainforest. It is considered a biodiversity hotspot with many unique species of plants and animals.
Earlier, President Bolsonaro of Brazil had promised the EU that his government would be a "responsible steward of Amazon". But the recent fires have threatened the trade deal between EU and Mercosur, a group of four nations led by Brazil, which would create a bloc of 780 million people representing a quarter of the world's economy.
Finally, a word or two about the shaky world financial order. Global manufacturing surveys indicate that industrial production in more countries has been falling to levels associated with contraction, with declines in large economies in Germany and China weighing heavily on markets, according to a report published in the Wall Street Journal on August 24. An index of factory activity in August declined in the US, Japan, Germany and the eurozone. The US government bonds sent a fresh warning about the economy: the 10-year Treasury yield in late August briefly slipped below that of the two-year—often viewed as a sign that a recession could be imminent. When long-term rates fall below the short-term, pundits call this the "inversion of the yield curve" and this has in the past been associated with an economic downturn.
Dr Abdullah Shibli is an economist and works in information technology. He is Senior Research Fellow, International Sustainable Development Institute (ISDI), a think tank in Boston, USA.