Brown, Sarkozy Need Obama to Spur Growth After Charting Rescue

By Simon Kennedy

Nov. 5 (Bloomberg) -- Europe took the initiative to create a system to bail out crisis-stricken banks and the U.S. followed. Now British Prime Minister Gordon Brown and French President Nicolas Sarkozy need Barack Obama to lead in repairing the damage to the global economy.

With the recessionary U.S. propelling industrial countries toward their biggest slump since 1982, how fast Obama can deliver a rebound at home will help guide the recovery in Europe and Asia. For all of its woes, the U.S. economy is still larger than that of the 15 euro nations.

``People are dying for economic leadership from the U.S., as no other country is capable of delivering it,'' said Denis MacShane, a U.K. lawmaker in the ruling Labour Party and former foreign office minister.

Brown's plan to buy equity stakes in banks became an international template even in the U.S. Having urged governments to ``reform capitalism,'' Sarkozy pushed President George W. Bush into convening the Nov. 15 summit of world powers in Washington to discuss new financial regulations.

The ultimate solution to the financial crisis, like its genesis, may still need to be American-made. Proof of how much a bellwether the U.S. remains: It is Europe's biggest customer, buying four times more than second-ranked China.

Sarkozy's `Buddy'

``If Obama can seize the moment, he will have the opportunity to set the international landscape for a long time,'' said Nicolas Veron, resident scholar at Bruegel, a Brussels-based research group. ``There is a capacity for new initiative from the U.S. that has been lacking.'

Obama would appear to have a mandate to lead beyond his borders. Three-quarters of 22,500 people surveyed in 22 countries by the British Broadcasting Corp. in September supported his candidacy. Even before yesterday's election, Sarkozy dubbed Obama his ``buddy'' and Brown credited his Democratic party with ``generating the ideas to help people through more difficult times.''

Governments around the world have learned through history that the U.S. sets the global economic agenda. Then-U.S. Treasury Secretary James Baker orchestrated the 1985 Plaza Accord that devalued the dollar after its rise hurt American manufacturers. Toward the end of World War II, U.S. President Franklin Roosevelt told Winston Churchill that free trade was his asking price for U.S. aid. The U.K. prime minister replied that while agreement may end up abolishing the British Empire, the U.S. was still ``our only hope.''

No Escape

European hopes of escaping the U.S. downturn have been dashed this year. JPMorgan Chase & Co. economists predict global gross domestic product will contract in the current and subsequent quarters. The euro area, which contracted in the second quarter, will keep shrinking through the first three months of 2009.

``I never believed in the idea of decoupling,'' said Nouriel Roubini, the New York University professor who predicted the financial crisis two years ago. ``When the U.S. sneezes, the rest of the world catches a cold. This time around the U.S. has a severe case of chronic and persistent pneumonia.''

Emerging markets such as China may also prove unreliable substitutes for U.S. growth. China's per capita income of $5,370 is 8.5 times smaller than that of the U.S. Hungary and Pakistan have joined Belarus and Ukraine in seeking help from the International Monetary Fund and Argentina faces renewed worries it will default.

Ailing Emerging Markets

``We can't delude ourselves to think America is in trouble and China and other emerging markets will fill the void,'' said Stephen Roach, chairman of Morgan Stanley Asia Ltd. in Hong Kong.

Pledging to rejuvenate the economy, Obama proposed on the campaign trail to spend $175 billion, including $25 billion for school repairs, roads and bridges, in addition to $500 checks for consumers to offset a rise in energy costs. He would also seek ways to help homeowners renegotiate mortgages.

``This is not just an American problem,'' Obama said Oct. 10 in Chillicothe, Ohio. ``In this global economy, financial markets have no boundaries. So the current crisis demands a global response.''

U.S. leadership is needed because power is diluted elsewhere. In Europe, 27 governments have their own ideas. Sarkozy needed to convene two weekend summits before leaders agreed to a bank bailout plan. Asia has no umbrella like the European Union or its Brussels-based Commission to coordinate policy.

It is also in the next president's interest to influence the international picture given that the U.S. is ``less dominant'' than when Bush was elected, said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London.

Still, Manu Bhaskaran, the Singapore-based head of economic research at Centennial Group Inc., a strategic advisory firm, said Obama may lack the influence to lead the world even if it welcomes his election.

``The U.S. is partly responsible for the mess that we have and has lost quite a lot of credibility,'' he said. ``It does not have the moral authority to push through solutions.''

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net