Protesters take part in an anti-G20 demonstration through the streets of Nice on November 1, 2011 in Nice, France. Anti-G20 protesters are gathered in Nice ahead of the arrival of the world's top economic leaders for the G20 summit in Cannes on November 3rd and 4th.Frederic Nebinger
The world's most powerful countries, who for three years have struggled to pull the world out of the deepest economic downturn since the Great Depression, are losing their grip, risking a second global recession.
Leaders from the Group of 20 nations will gather in Cannes, France, on Thursday amid the bleakest economic outlook since the spring of 2009, when the group marshalled some $1-trillion (U.S.) in emergency financial aid at a summit in London.
Greece's surprise decision to hold a referendum on Europe's proposed bailout hit financial markets like a tsunami, setting off waves of panicked selling that sank stock markets around the world on Tuesday.
Underscoring the threat posed by heightened market volatility was fresh evidence that the world's biggest economies are suffering from a lack of momentum. New data showed factory production in the United States and China came close to stagnating in October, while the latest reading on British gross domestic product suggests the economy still is suffering.
The Reserve Bank of Australia, the first G20 central bank to raise interest rates after the financial crisis, cut its benchmark rate Tuesday, citing a "significant slowing in economic activity in Europe" that is hurting Australian exporters.
"It is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," Glenn Stevens, the Australian central bank's governor, said in a statement.
Other assessments of the economy are starker.
The Paris-based Organization for Economic Co-operation and Development said this week that uncertainties related to the short-term economic outlook have risen "dramatically" in recent months. Jan Randolph, the head of sovereign risk at IHS Global Insight in London, said Tuesday that the world economy was on the precipice of another economic downturn.
"Only quick implementation of the euro zone rescue deal in full … combined with co-ordinated stimulative measures by the G20 leaders can avert a second global recession," Mr. Randolph said in report for his firm's clients.
Yet unlike 2009, politicians appear to lack the focus to make a significant impact as a group. Expectations for the Cannes meeting are exceedingly low.
"Every single G20 meeting has been less impactful than the preceding one," Moises Naima, senior associate in the international economics program at the Carnegie Endowment for International Peace in Washington, said on a conference call Tuesday.
Japan this week intervened in foreign exchange markets to reverse the yen's ascent to a record high against the U.S. dollar, a blow to the efforts of the U.S., France and others to use the G20 as forum to convince China to adopt a floating exchange rate.
Greece isn't a member of the G20, but Prime Minister George Papandreou's referendum plan raises serious questions about the solidity of the financial rescue plan agreed to last week after two tense summits of the European Union in Brussels.
French President Nicolas Sarkozy and German Chancellor Angela Merkel had intended to use the G20 meeting in Cannes to rally international support for Europe's financial rescue plan, including potential financial contributions from countries with big stockpiles of reserves such as China, Brazil and South Korea.
Now, the French and German leaders are scrambling to maintain confidence in a program that already was facing heavy scrutiny in financial markets for lack of details. Mr. Sarkozy and Ms. Merkel discussed the Greek situation Tuesday, issuing a joint statement from Paris and London that called the rescue "more necessary than ever today." The two leaders scheduled a meeting with other European officials and the International Monetary Fund for Wednesday in Cannes, and Mr. Papandreou's office said the Greek leader would also head to the French resort town.
Some say it's a mistake to expect too much of the G20. Over all, the world economy is in better shape than it was three years ago, and the weight G20 statements carry in national legislatures is limited, said Phillip Swagel, a professor of international economic policy at the University of Maryland.
Still, the G20 could take concrete steps to shore up economic growth. Uri Dadush, another Carnegie economist, said the G20 could pledge to boost the IMF's financial arsenal to persuade markets that big economies such as Italy won't be allowed to fail. Fred Bergsten, director of the Peterson Institute for International Economics, said the G20 countries with fiscal room could promise new stimulus measures to boost demand.
"You could put together a package that would add up to more than the sum of its parts," Mr. Bergsten said at a press briefing. He's not counting on one, however. "Bottom line is not much is expected at Cannes."