Missionsnet

Governments are not doing enough to co-operate on rebuilding troubled financial systems and fiscal stimulus packages alone will not boost economic growth, according to the heads of the International Monetary Fund and the World Bank.

Robert Zoellick, president of the World Bank, said on Monday that pumping government money into the economy was not enough by itself. “If you have fiscal stimulus without fixing the banking system, it will be like a sugar high,” he told the Financial Times.

Mr Zoellick said the necessary solutions to the global economic crisis were well known: co-ordinating fiscal stimulus, keeping credit markets moving, dealing with bad loans in banks, fixing regulation, resisting calls for trade protectionism and safeguarding the most vulnerable developing countries. “There is a lot of good economic advice out there,” he said. “The challenge is the political leadership.”

Dominique Strauss-Kahn, managing director of the IMF, echoed Mr Zoellick’s concerns saying the Group of 20 big economies had failed to fulfil promises to co-ordinate global action to boost the economy and rebuild shattered banks.

At the G20 meeting in November, “governments spoke with one voice”, he said, pledging to recapitalise troubled banks, remove toxic assets from the financial system and co-ordinate fiscal stimulus. “But very little has been done and time is running out,” Mr Strauss-Kahn said. “It is moving very slowly.”

In the US, lawmakers and state officials have declined to rule out adding another financial rescue plan to the $700bn troubled asset relief programme (Tarp) passed by Congress in October. Last week the UK announced a plan to insure the troubled assets held by financial institutions, in another attempt to get banks to keep lending. But few governments have yet contemplated more radical measures such as wholesale nationalisation of their banking systems.

Mr Strauss-Kahn acknowledged that voters found it much harder to support spending to rebuild banks than to build hospitals as part of a fiscal stimulus, but that governments needed to make that case to their citizens. “One dollar of spending on banking may be more useful at the moment” than a dollar of spending on infrastructure, he said. “As long as the financial system is not restructured, all the money from stimulus will go into a black hole.”

Heads of government from the G20 will next meet in London on April 2 to discuss progress since their meeting in November. Working groups from the G20 have been looking at reform of multilateral institutions – including the IMF – financial regulation and international co-operation on economic and financial policy.

Some G20 officials privately acknowledge that the grouping’s credibility has been hurt by its failure to live up to a promise not to undertake protectionist actions for 12 months. Five G20 countries announced their intention to raise tariffs within a month of the meeting. Mr Zoellick said: “The [protectionist] steps taken so far have been small steps, but we have to keep watching.”

The World Trade Organisation is moving to increase its surveillance of member economies, seeking to make public an existing regular internal report of governments deciding to raise tariffs or otherwise restrict trade. “Does that mean that you are going to stop all of them? No,” Mr Zoellick said. “But it is great that there is pressure against them.”

Participants in the process say the G20 has shied away from trying to deal with the vexed question of exchange rates, saying that the grouping could not proceed given the lack of consensus.