The ultimate piper

Market turmoil: During the financial crisis, governments looked like the true masters of the universe — rescuing banks and economies and vowing to humble financiers. But as the tumbling euro and last weekend’s G20 finance minters’ meeting have made clear, once again investors are calling the tune, which has rapidly shifted from a stimulus-allegro to a cacophony of fear.

The financial world was subservient as long as its near-death experience remained a recent memory -- and perhaps as long as central banks were increasing monetary stimulus. Markets rose in the face of many risks: big government deficits, euro zone fractures, massive bad debts in Spain and Hungary (just to name a couple of especially disordered economies) and a somewhat tepid recovery.

But the trend has turned. The MSCI World stock index has dropped 15 per cent since mid-April, and the euro is down 13 per cent against the dollar. Governments might want simply to order investors to play along. That is not possible, not with big deficits to finance, restive taxpayers and vows to avoid both high inflation and sovereign defaults. The recession may have damaged the credibility of free market ideology, but financiers have once more taken over the conductor’s podium.

What do the new maestros want? They agree on the need for high profits and more respect. Spreads have widened on all sorts of potentially troubled debt. A planned global bank levy has been shunted aside. Bankers also seem to have gained enough political strength to ward off most populists attacks on their business practices and pay scale.

But when it comes to fiscal policy, financiers seem almost bipolar. Until a month ago, they were Keynesians, worrying that bad debt problem would get worse without high fiscal deficits to support strong GDP growth. Then they suddenly turned orthodox, demanding austerity plans and doubting the durability of the unconventional fiscal arrangements of the euro zone.

The latest G20 communique, which highlighted the “importance of sustainable public finances” shows governments have been scurrying to keep up. But they may have to do more to get markets to sing from a happier hymn sheet.