Economic Summit: Major Problems, Modest Hopes

This weekend's global economic summit in Washington isn't generating a lot of enthusiasm on Wall Street. But some are hoping that the gathering of 20 industrialized and emerging nations might actually yield some tangible results.

Among them: some effort by the so-called Group of 20, or G-20, to coordinate fiscal stimulus programs, as well as more money for the International Monetary Fund, which has been helping battered emerging markets but is now down to its last $100 billion.

“I think what markets would like to hear is a clear statement of the problem, a clear statement of what needs to be done and then the specific implementables to reach this,” says Simon Johnson, a former IMF research director, and now a senior fellow at the Peterson Institute for  International Economics. “Markets would like to see a big, coordinated, cooperative approach.”

The meeting is set against a backdrop of deepening economic crises for many advanced and emerging economies, plunging markets for stocks and currencies and the need for a concerted policy response.

The Bush Administration, which reportedly only reluctantly agreed to the summit, has downplayed expectations for anything other than short-term crisis measures.

"We expect that leaders will want to come to an agreement on an action plan identifying specific implementation measures," Dan Price, assistant to the President for International Economic Affairs, told reporters Wednesday.

Still, markets are looking for more fiscal stimulus packages, such as China’s $586 billion plan unveiled this week. Officials in a number of European countries have indicated in recent days they are considering stimulus packages, which if coordinated could carry greater punch to stoke the global economy.

Video: Treasury under-secretary David McCormick talks about the G20 summit.

This includes Germany, which has been reluctant because of its traditional inflationary worries and Britain, where the Bank of England governor, Mervyn King announced it now favors a fiscal stimulus, probably in the form of hand-outs to low-income citizens.

But expectations of a broader coordinated fiscal stimulus might flounder on the Bush Administration’s stated skepticism about the need for a second US fiscal package after the tax rebates offered earlier this year.

For Investors

• What Obama Should Do for Markets
• Buy Small-Caps NOW
• Pros: S&P Rally Could Last Until March
• Web Exclusive: Cramer's Picks and Pans

The IMF, meanwhile, has enough money to bail out another handful of countries. But there are at least 20 sizeable economies that may soon come knocking on the IMF’s door for emergency financing, warns Johnson.

Failure to come up with sizeable new commitments for the Fund could provide China with an opening to leverage its huge foreign reserves for its geopolitical ambitions, say other analysts.

“A weak IMF could hand a powerful foreign policy tool to China,” warns Sebastian Mallaby, senior fellow at the Council of Foreign Relations. 

The G20 summit comes at an awkward moment for Washington because of the political transition, and has dimmed expectations that it will be anything but the most tentative beginnings of a wholesale redesign of the global finance order.

The Bush administration is opposed to any such broad international initiatives while President-elect Obama has declined to participate, except through surrogates.

“The risk is that the US will have a different agenda than many if not all the other countries participating because many of them have already publicly announced that they are hoping to leave the summit with specific reforms, as well as specific plans for how to implement to those reforms,” says Heidi Crebo-Rediker, a former investment banker in Europe, and now a scholar at the New American Foundation.

But the current betting is that there will be a leadership vacuum unless the Europeans “pull a rabbit from their hat,” says Johnson. 

To do that the Europeans would need to display adroit economic diplomacy, perhaps by accommodating developing country demands for greater say in the IMF (by ceding some of their eight, of 24 IMF seats) and then backing up this up with fresh fiscal commitments.

But Johnson said this seemed unlikely since some indication would normally have already emerged before the formal meeting on Saturday.

“My reading of the tea leaves is while the Europeans called for the summit…it is not clear what the Europeans are putting on the table,” said Johnson. “I think the summit could well be a flop.”

Those with more modest expectations can see this as the beginning of a process that eventually lead to an overhaul in the architecture of increasingly integrated financial order.

"This [meeting] is a big global rethink that will hopefully create at the end of the day a system that can flag and manage in a better way potential crises and also one that is acceptable for what our 21st century financial system has evolved into,” says Crebo-Rediker.

—Reuters contributed to this report.

© 2009 CNBC.com