There is a serious risk that tomorrow's G-20 summit in London will do little more than provide a prominent stage for anticapitalist anger and acrimonious bickering among governments. This would be especially regrettable now that international cooperation is more essential than ever and when widespread public anger and witch hunts are already hindering efforts to stabilize the financial sector and rekindle growth.

[Commentary Europe] Corbis

Decisive and coordinated policy action now could leverage the tentative, moderate improvement in macroeconomic data and sentiment that we have seen in recent weeks into a sustained improvement in financial and economic conditions. That timing alone makes this summit especially important.

After the sudden and dramatic plunge in economic activity of the past six months, even the most pessimistic forecasts now envision a deceleration in the pace of contraction, which could constitute the first sign of bottoming out. Glimmers of hope have begun to appear: U.S. private consumption expenditures seem to have stabilized in the past couple of months; surveys of purchasing managers in Europe show signs of finding a floor; and China's fiscal stimulus is gaining traction. Investors, tired of contemplating a never-ending scenario of doom and gloom, are now looking to anticipate the recovery.

Yet fear still retains the upper hand. Credit markets have so far refused to share the nascent optimism of equity markets. A lack of confidence in the financial sector persists, and delays in the impact of policy actions are feeding skepticism about their effectiveness. The looming rise in corporate defaults and unemployment will provide a formidable headwind against optimism.

This is a crisis born of a collapse in confidence, triggered by a lack of information and transparency in the financial sector and by the initial fumbling policy reaction. Restoring confidence remains essential, and isolated interviews and TV appearances by policy makers will not suffice. We need a change of pace in global leadership commensurate with the unprecedented depth and complexity of the crisis -- now.

Unfortunately, the leaked G-20 draft communiqué is not reassuring. So far, the only concrete result likely to emerge from the summit is the already mooted doubling of the International Monetary Fund's resources to $500 billion. This is an important step forward that would provide the IMF with the firepower it needs to promptly contain further crises in emerging and developed markets. It may also act as a prelude to a rebalancing of voting powers within international financial institutions.

Yet this G-20 summit must aim higher. First, the distracting dispute over the primacy of financial regulation versus further fiscal stimulus should be swept aside; we clearly need both. Policy makers should accelerate their existing efforts to overhaul financial regulation. The bulk of the benefits will be reaped in the future, but do not underestimate the immediate, positive impact such an action would have on investor sentiment -- provided we get more effective and focused regulation rather than a shopping list of longstanding designated targets.

Priority should be given to harmonizing regulatory standards internationally and establishing a stronger and continuous flow of information among national regulators and supervisors. By contrast, the emphasis on regulation of hedge funds seems misplaced, given that they have been mostly collateral damage in a crisis that originated in the highly regulated banking sector.

Second, G-20 leaders should reach a broad agreement on how to share the burden of further fiscal stimulus and commit to a coordinated exit strategy from the massive fiscal and monetary expansion under way. This will require a drastic change from the latest cacophony of cross-accusations. Lately, the U.S. has reiterated its call for Europe and Asia to spend more, while Angela Merkel has restated Germany's determination to stick to an export-oriented strategy and China has flaunted the seemingly quicker response of its economy and called into question the U.S. dollar's role as the primary reserve currency. At the same time, Europe's emphasis on the need for a timely reduction in public expenditures and a rise in euro-zone interest rates once a recovery begins has clashed with U.S. Treasury Secretary Timothy Geithner's warning not to put the foot on the brake too soon.

This public exchange of criticism must end. An open debate on the use of vast amounts of public money is absolutely essential. But watching the U.S. accuse Europe of not doing enough to trigger a recovery, and Europe counter that the U.S. is sowing the seeds of the next crisis, can only undermine investor sentiment further.

Europe will need additional fiscal stimulus, and the fact that the IMF forecasts a deeper recession and less dynamic recovery in Europe than in the U.S. should engender a greater degree of humility on the Continent. According to UniCredit estimates, automatic stabilizers -- which refer to the decline in tax revenue and the increase in social-welfare payments that naturally occur as growth slows and unemployment rises -- account for more than two-thirds of the projected fiscal boost over 2009-2010 in Germany, and nearly the entire amount in Italy. This of course reflects the stronger welfare system in Europe, but automatic stabilizers are not fully equivalent to fiscal stimulus. A worker losing his job does not see his purchasing power boosted because he no longer has to pay income taxes.

The IMF estimates that the average fiscal stimulus for advanced G-20 economies will be 1.5% of GDP in 2008-2009. The virulence of the crisis suggests that these countries will likely need additional stimulus this year and next. G-20 leaders should pledge to coordinate these spending programs in a way that does not re-create global macroeconomic imbalances. G-20 leaders must also credibly pledge that fiscal stimulus measures will not become protectionism in disguise.

At the same time, the importance of a credible commitment to restoring fiscal sustainability is obvious. Bond markets already show signs of unease at the quantum leap in fiscal deficits, and the looming problem of aging populations in many countries will soon bring more pressure. Establishing such a credible commitment won't be easy: Part of the euro zone's woes stem from the fact that the Stability and Growth Pact has been largely ignored, with most countries running a pro-cyclical fiscal policy during the boom instead of reducing public spending and debt. G-20 countries should explicitly commit to a fiscal consolidation path, mostly via a sustained reduction in public spending, once global growth returns to potential.

Credibility needs to be established early on. The G-20 should use this summit to prove with concrete and coordinated commitments that global leadership is finally coming of age.

Mr. Annunziata is chief economist for UniCredit Group.

http://online.wsj.com/article/SB123852774130074841.html

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved