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Hugs not tugs at G-20 summit in London

| Sunday, April 12, 2009

Queen Elizabeth's spontaneous gesture of placing a welcoming arm on American first lady Michelle Obama's back was unprecedented. This so-called "hug" also was of great importance. Watched throughout the world, but understood by few, it was an example of how the queen is rarely appreciated as an important political player.

In a single sensitive movement, she played a major card in the restoration of the vital but flagging Anglo-American special relationship. In addition, Her Majesty laid the foundation for Prime Minister Gordon Brown to achieve a conference that succeeded in hiding deep rifts behind smiles, a display of unity and goodwill and a final communique that appeared as a formidable and coordinated fight against worldwide recession.

In view of the forecasts of an acrimonious G-20 meeting, this was a major achievement and led the world's stock markets higher.

But what is the reality behind the hugs, smiles and thumbs up• What, if anything, really has changed to lead the world back to genuine prosperity?

From the outset, the G-20 meetings took place against a tense background over five main issues.

First and most importantly, there was a fundamental split between what French President Nicholas Sarkozy termed "the Anglo-Saxons" (U.S. and U.K.) and the German-led European Union over the basic methods of dealing with recession.

German-led Europe offers socialized medicine and comprehensive social and unemployment benefits. Europeans therefore believe they can withstand the massive unemployment demanded by deleveraging and the healthy restructuring of their economies without serious civil unrest.

Americans do not have access to the same level of social benefits. The administration, therefore, is positioned to fight recession with massive, trillion-dollar infusions of cash, financed by debt.

The Europeans and Australians doubt that a chronic debt problem can be solved by the application of more debt. This formed the main hidden disagreement at the G-20. Indeed, the current EU president recently termed American policy as "the road to hell." This conceptual rift was papered over and was an important but likely Pyrrhic victory for the Anglo-Saxons.

Second, led by China, certain creditor nations pushed for the replacement of the U.S. dollar as the world's official "reserve" currency. In clause 19 of the communique, the G-20 authorizes the International Monetary Fund to issue $250 billion of new "magic" money in the form of Special Drawing Rights (SDRs). Unlinked to gold, this enables the IMF to create money, possibly the embryo of a new world "reserve" currency as it practices global "quantitative easing." Meanwhile, the U.S. and U.K. remain free to continue forcing taxpayers and every holder of their depreciating currencies to finance their profligate borrowings.

Third, many foreign governments lay the blame for the world's financial fiasco at the feet of America and Great Britain. Led by France, the Europeans called for a new international regulatory regime. Likely to have been socialist in style, it would have crippled the financial centers of New York and London, pushing expertise towards centers in Singapore, Hong Kong and Tokyo.

The fact that the G-20 agreed only to monitor and coordinate their own tougher regulations under a Financial Stability Board also was a significant victory for the Anglo-Saxons.

Fourth, there was growing fear that, with recession, individual nations would resort to protectionist trade practices and competitive devaluations to enhance exports. Various noncommittal commitments were issued to push this problem into the long grass.

Finally, the demonstrations in London made all G-20 participants graphically aware of a potentially dangerous upsurge in popular revulsion at the politics of reckless greed displayed by governments and financiers. Bankers in London were instructed to dress in jeans rather than suits to escape physical assault.

Without doubt, President and Mrs. Obama achieved personal triumphs. The president engaged in some important and apparently successful bilateral talks. The most significant of these was with the leader of China, America's largest creditor.

It was dubbed the "G-2." Such bilateral meetings and the sight of angry crowds may have "persuaded" the German-led Europeans to avoid political tugs and accept the less socially painful Anglo-Saxon agenda.

Modern politics is a process influenced by events. While Queen Elizabeth's hug was an event, it was repeated in France by Madame Sarkozy. The royal hug appears to have proved more powerful than tugs during a time when people were looking for goodwill.

This seminal gesture might even have triggered a coordinated world economic process.

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