World leaders are gathering in Europe this week to deal with "the greatest challenge to the world economy in modern times" — as a leaked draft of the communique being prepared for the meeting puts it.
Thursday's summit of leaders of the G-20 — the world's big industrial countries and emerging market nations — will be the first test of President Obama's leadership on the world stage.
"For President Obama, this is an opportunity to show that the U.S. is fully engaged with the rest of the world," Michael Froman, Obama's deputy national security adviser for international economic affairs, said at a Brookings Institution event Monday.
Froman and advisers to other leaders have been hammering out a draft agreement for Thursday's summit. It includes strategies for stimulating economies, rescuing the banking system and reforming financial regulation — issues the Obama administration has been grappling with.
"[Obama] will be able to go to London and say, 'Here is our global agenda. We each need to take steps in the following areas, and the U.S. has begun to do so,' " Froman said.
'These Are Not Big, Bold Steps'
But Simon Johnson, a former chief economist with the International Monetary Fund who is now a fellow at the Peterson Institute for International Economics, says the draft communique suggests the G-20 is not ready to take dramatic steps.
"There's language about how we're in the worst crisis since the Great Depression, but if you look at the policies on the fiscal side, on the regulatory side, it's not actually that dramatic," Johnson says. "These are not big, bold steps. It's a little bit hard to actually justify the holding of a summit on this basis."
Indeed, the top item in the draft communique is titled "Restoring Global Growth Now." But despite a big push for more stimulus from the United States, the communique focuses on what countries have already done, without pledges for more stimulus. That's partly because Europeans, especially the Germans, fear more government spending could ignite inflation.
Funding For IMF
But the United States may achieve its goal of more global stimulus in another way. The draft communique calls for additional resources for the IMF to lend around the world. The numbers are still undecided but could reach a trillion dollars. Johnson says that could make the difference between a successful summit and a failure.
"I think if they can deliver the money for the IMF — real, concrete substance dollars ... by the end of Thursday, then we can call it a success," he says. "If they don't, then it's a flop."
Kemal Dervis of the Brookings Institution says the additional funding for the IMF is especially important to developing nations who don't have the money to stimulate their own economies and have based their economic growth on exports.
"Unfortunately, because the crisis is so global now, exporting yourself out of it, by yourself, is not an option," Dervis says. "So we have to have this global revival of demand and everybody participating in it."
Japan and the European Union have pledged $100 billion each to boost IMF resources, and the United States has suggested it will provide a similar amount. The big question is how much China will contribute, given its huge surplus of foreign reserves. China has indicated that in exchange for a large contribution, it wants a greater voice at the IMF. Dervis says that makes sense.
"We cannot have a G-20 with China, India, Brazil at the table, and others, and think that the IMF can be governed in the old ways," he says.
A Shift In Decision-Making
This is the second G-20 summit since the financial crisis erupted. The first was held late last year in Washington, hosted by the Bush administration. The draft communique for the London summit echoes much of what was said then. In addition to calls for greater regulation, more resources for the IMF and reviving global growth, the leaders will once again pledge to avoid raising trade barriers to protect their economies.
Froman, the Obama adviser, acknowledges that after the last summit, most countries failed to live up to that pledge.
"No country has been perfect. Everybody is a bit of a sinner, but this is a time for everyone to come back and try and — a bit of a revival meeting among sinners," he said.
Whether or not this G-20 summit is judged a success, there's little doubt that global economic decision-making is shifting from small, clubby institutions like the G-8, to larger, more inclusive groups that reflect the changes in the global economy.