The Fear Is G-7 Cannot Match the Crisis Response of the Past
Trump, as the host of G-7, was nudged by European leaders into holding an emergency conference call to tackle the coronavirus.
(Bloomberg) -- U.S. President Donald Trump, as the host of the Group of Seven, was nudged by European leaders before he agreed to hold an emergency conference call to tackle the spiraling threat of the coronavirus. That does not bode well for the outcome with investors already asking whether policy makers have the tools to stop an economic meltdown.
European markets tumbled on Monday despite an emergency rate cut from the Federal Reserve as the damage to activity comes into focus. The STOXX Europe 600 fell more than 5% to its lowest level since 2013.
Chancellor Angela Merkel in particular, who helped orchestrate a pressure campaign behind the scenes last week to make the G-7 call happen, worries that the group won’t be able to agree to the sort of coordinated action that would shift sentiment, according to a German official. The videoconference is due to take place at 10 a.m. Washington time Monday.
Merkel was liaising with French President Emmanuel Macron before he spoke to Trump on Friday afternoon and persuaded him to organize the talks. The Europeans were already feeling bruised after Trump closed U.S. airports to flights from Europe without consulting them. Now they want a commitment that it won’t happen again and a plan to coordinate on economic stimulus, officials said.
Over the weekend, mistrust was fueled by a newspaper report that Trump tried to recruit a German-based company to give the U.S. exclusive access to a possible coronavirus vaccine. A member of Merkel’s cabinet said her government was discussing the matter. A White House official said the administration’s virus task force was unaware of the report or the underlying information.
As government leaders sought to craft a common response, the Federal Reserve stepped in by cutting its main interest rate to near zero and announcing $700 billion in bond purchases to cushion the U.S. economy. The Fed, in coordination with other major central banks, also lowered the rate on standing U.S. dollar liquidity swap arrangements.
Recession Path
The world economy is now barreling toward its first recession in just over a decade after early hopes of a fast rebound from the coronavirus were dashed. Once viewed as just a risk to supply as it closed Chinese factories, the virus is now damaging demand worldwide and investors are panicking about why policy makers have not moved faster or together to shield their economies.
But policy coordination may prove a stretch for the system of international cooperation built around the G-7 that has been creaking ever since Trump was elected on his “America First” platform in 2016.
The 2018 summit was a disaster with Trump withdrawing from the final communique after taking offense at a comment by Canada’s Justin Trudeau. The group went some way to patching things up at Biarritz last summer, where a spirited debut by the U.K.’s Boris Johnson helped lighten the mood. This time, the Die Welt article about Trump’s alleged approach to German biotech company CureVac AG risked causing tension.
Shifting the Burden
Central banks have led the rescue through a combination of cutting interest rates, intervening to keep markets functioning and prodding banks to offer cheap and easy credit to companies. Monetary policy makers have made it clear that they can’t save their economies alone, in part because their stimulus of the past decade has left them with less room to maneuver.
“The response should be fiscal, first and foremost,” European Central Bank President Christine Lagarde said last week.
Merkel still thinks strong, coordinated action from the G-7 will likely prove too much to expect at this point, according to a person familiar with her thinking.
One U.S. official acknowledged the damage done to trans-Atlantic relations by Trump’s ban on European travelers and said there’s a draft statement that includes ambitious goals on future coordination. Still, the official said, it’s unclear whether the statement will be adopted, and the final decision is likely to hinge on Trump, as he leads the discussions this year.
Split View
The U.S. administration is still at odds with the Europeans in its assessment of how serious the economic impact of coronavirus will prove.
Treasury Secretary Steven Mnuchin said Sunday he doesn’t expect the U.S. economy to tip into recession and forecast “a big rebound” later in the year. That contrasts with a Bloomberg Economics model, which sees a 53% chance of a recession within the next year.
The U.S. administration pushed back on the idea that the Europeans had to cajole Trump into setting up Monday’s videoconference. The White House was already working on preparations for the call before the president’s conversation with Macron, according to a person familiar with the president’s plans.
And indeed, even the Germans will acknowledge the U.S. isn’t the only country that’s been pursuing its national interest without checking in with its allies. Several EU states have imposed border restrictions in recent days without consulting the rest of the bloc and an EU export ban on protective medical gear does little to bolster its calls to the G-7 for collective action.
--With assistance from Justin Sink, Ania Nussbaum, John Follain, Tim Ross, Isabel Reynolds and Stephan Kahl.
To contact the reporters on this story: Ben Sills in Madrid at bsills@bloomberg.net;Arne Delfs in Berlin at adelfs@bloomberg.net;Jenny Leonard in Washington at jleonard67@bloomberg.net
To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Tony Czuczka
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