I thought I could safely ignore the election for a few hours this evening. I voted days ago by post. And not much normally happens before the polls close at 10 pm.

But the past few hours has seen worrying economic tremors – as a raft of bad news from China and Europe, combined with skittishness over what will happen in Westminster tomorrow, drove a panic in the markets (with a trader’s error possibly fuelling the chaos [for more - see Felix Salmon]).

A 4 per cent drop in Chinese stocks started the downbeat mood, which carried over to Wall Street’s S&P 500 index, which was down 6 per cent to 1,065 – its sharpest correction in over a year, erasing its 2010 gains in one afternoon. The VIX index of market volatility spiked to its highest in a year.

“It’s really shocking,” said Jeff Palma, global strategist at UBS. “Stocks fell to minus nine on the year within seconds, that was a pretty shocking move. This is not your normal every day pull back, this is a pretty full-on collapse in risk appetite.”

As Alex pointed out earlier this week, bond markets will be open at 1 a.m. (in just four hours’ time) – at which they throw fuel onto the fire if they so choose:

Bond traders will be able to react in real time to results rolling in from key marginal seats, in other words: so as well as measuring how the night’s going through the traditional BBC swingometer, we’ll also be able to track progress through yields on three month short Sterling interest rate futures. Well, great.

All this reinforces how the UK – bereft of leadership throughout the campaign – has been sleep walking as a new economic reality (and a pretty disastrous one, at that) unfolds around it.

That’s why, over a week ago now, I called for the Chancellor (for now, at least) Alistair Darling to get off the campaign trail and get back behind his desk:

Election or no election, the UK simply cannot afford to sit on the sidelines while this crisis runs out of the control. Alistair Darling needs to stop giving speeches to activists in Scotland and get back to work at the Treasury.

Lord Adonis stopped campaigning as soon as Eyjafjallajökull erupted. Darling must do the same as the UK faces contagion from Eurozone turmoil.

Let’s hope he is at work now. Until a new PM has the ‘confidence of the House’ (and if results are close, that could take days to work out), he is 100% responsible for the British economy.

If necessary, he needs to haul in George Osborne and Vince Cable, and hammer out a consensus behind any short-term fire-fighting measures that might be necessary.

Once we have a new government – and assuming we have weathered any immediate post-election crisis – the team (of whatever political colour) will need to take an extremely active approach to economic policymaking.

Gordon Brown may have got the UK into this mess (he did), but there can be little doubt that the British government has played an important, and at times pivotal role, in trying to patch things back together again.

You just have to look at the absolute mess that the Germans and French have made of responding to the Greek crisis to see that this is a time when any half-way competent hand needs to be called onto the bridge.

I continue to believe that we’re seeing the latest stages of a crisis that stretches back until at least the late 1990s. This long financial crisis should force leaders to admit that they are part of an economic system that (i) they don’t understand; and (ii) seems to becoming more volatile, rather than less.

So how should the new PM and his Chancellor react? Here are three pointers – each of which cover the UK’s international economic policy (and its domestic policy, insofar as it is important to broader global financial stability).

First, the new government needs to balance the risks inherent in high levels of public and private debt.

We have heard a lot about the government’s deficit in this election, and quite a bit about its overall debt. But almost nothing has been said about colossal levels of private debt.

Private citizens owe much more than the government – most of it in the form of mortgages, secured against a residential property market that is significantly overvalued. (I wrote at length about the election and the housing crisis here.)

It’s no good trying to appease the global financial markets simply by cutting spending or raising taxes. Stall the recovery and unemployment will shoot up, while property prices will head down, threatening the banks again, and sending the tax take much lower.

No-one is going to be fooled into believing that the government can repay its debt, if we are hit by the twin nightmares of a double dip recession and housing market crash. That really would be game over.

So what can the government do?

There is so little room for manoeuvre that the unfortunate answer may be: nothing. However, I think the best strategy would be as follows:

• Take immediate and dramatic action to cut the structural deficit (I’d raise retirement age immediately, and then peg it to life expectancy – but any package of credible long-term tax or spend commitments would do).
• Avoid raising taxes or cutting spending by much in the short term, as the economy is still too fragile to take it (the government should probably make less of a song and dance about its caution here).
• Be explicit with the markets that interest rates will be kept low (propping up the housing market and boosting growth), even as the economy recovers – that the government’s main weapon against inflation will be its own spending. Think of this as a piece of reverse-Keynesianism.
• Take action to ensure that today’s secondary bubble in the housing market is not allowed to inflate further. Plans to cut stamp duty, for example, should definitely be put on hold. We don’t want housing prices to fall too fast, but neither should they be allowed to rise above today’s totally unsustainable levels.

Second, the government needs to get stuck into the Eurozone crisis, as I recommended in my post on Europe earlier this week, when I recommended that it should be:

…aiming for (in order of preference): (i) A strengthening of the Euro with greater sharing of economic sovereignty among Eurozone members (but with the UK left on one side); or (ii) An orderly removal of the weaker economies from the single currency.

Even on the Euro, the UK has some influence as an honest broker, given its position as an interested party, but not a full player. Cameron should adopt this role wholeheartedly – reminding British voters that the disorderly breakup of the single currency would be absolute disaster for the UK economy.

Third, we need to get the G20 back on track.

It briefly emerged as the forum for tackling the global economic crisis, but has now gone AWOL for, I suspect, a number of reasons:

• Obama is embroiled in a political system that cannot make foreign policy decisions.
• The Chinese are still bruised after Copenhagen.
• The Eurozone powers have utterly lost their nerve, and
• The Brits have left the field as the election approached.

Only the G20 has any hope of steering the global economy through what seem certain to be some exceptionally rocky times. If it is allowed to become a hopeless talking shop like the G8, then I think we are probably screwed.

Over the next year or so, the UK’s G20 policy will be its foreign policy. It’s essential that we have some radical new ideas to put on the table.

[Read the rest of our After the Vote series.]

- Francis Fukuyama talks to former US Treasury Secretary, Henry Paulson, about China’s approach to the financial crisis. Daniel Drezner, meanwhile, reports on the discontent of leading G20 countries at Beijing’s apparent insouciance over implementing agreed economic reforms.  Elsewhere, Patrick Messerlin charts the actions of the emerging G20 powers across economics, trade, and climate – suggesting that while much progress has been made, they still require leadership from OECD countries. Oxfam’s From Poverty to Power blog, meanwhile, offers a progress update on the financial transaction tax.

- Elsewhere, Der Spiegel interviews the man that headed Obama’s transition team, John Podesta, who offers his thoughts on the healthcare debate, the Washington political process, and Obama’s engagement with the rest of the world. The FT’s Edward Luce and Daniel Dombey, meanwhile, assess the centralised nature of foreign policy decision-making in the Obama White House – highlighting the emphasis placed on improving the inter-agency process compared with the Bush years, but also the lack of a grand strategic thinker to which the President can regularly turn (à la Kissinger).

- Finally, Prospect Magazine has an interesting article on “seasteading” – described as involving “a future in which the high seas will be increasingly commandeered for unconventional purposes” (such as medical tourism, gambling, sanctuaries for minority groups etc.) – and the opportunity it may present for the creation of “micronations” populated by libertarian-minded groups.

- The core negotiations seem set to finalise agreement over a “framework for balanced and sustainable growth” – particularly critical from US and Chinese perspectives – that seeks to give the IMF a greater reporting role in policing global imbalances. The FT’s Money Supply blog offers a sceptical comparison of the leaked draft agreement with the IMF’s current role.

- As to the Europeans: Gordon Brown seems to be adopting a broader focus, calling in an NYT op-ed for “a new system of governance” to form the “next common economic goal”. (He also announced that UK Business Minister Shriti Vadera would be going on secondment to the South Korean government to help develop proposals on global financial architecture ahead of their G20 presidency next year.) For Angela Merkel, the “most important subject” is financial regulation; she argues that “we must not search for substitute issues”; and for Sarkozy too, the top priorities look to be bankers’ bonuses and agreement over capital requirements for banks.

- Trade and protectionism are sure to form another important aspect of negotiations, particularly for China and India. VoxEU takes an interesting look at trends in world trade since the November 2008 Washington Summit,  highlighting how G20 states’ oft-proclaimed commitment against protectionism has been broken by member governments approximately once every three days since last year’s commitments. “No other statistic”, Simon Evenett argues, “better demonstrates the paucity of global leadership on contemporary protectionism”.

- Robert Zoellick, President of the World Bank, calls for the summit to focus on the world’s developing economies, highlighting the positive contribution they can make to the health of the global economy. Pittsburgh, he argues, can mark the advent of a more “responsible globalisation” founded on “multiple poles of growth”. Brazilian President, Luiz Inácio Lula da Silva, meanwhile, presents his take on the G20 grouping in the LA Times.

- Around the think tanks, finally: Brookings has an in-depth report focusing on some of the broader implications of the G20 agenda, from the protectionism issue to African and Latin American perspectives, as well as assessing the G20’s approach to climate change. The Carnegie Endowment, meanwhile, has an interesting take on Saudi Arabia’s approach to the summit, given its increasing exposure to instability in the financial markets and vulnerability to shifts in oil and food prices.

Elsewhere, Chatham House has analysis of some of the key short-term economic indicators, as well as long-term GDP forecasts – arguing that it is still to early too be coordinating exit strategies. The Canadian-based Centre for International Governance Innovation, meanwhile, takes a comprehensive look at some of the challenges facing the G20 as a forum for global economic governance, with contributions from policymakers and academics alike.

- Expect to hear lots about bankers’ bonuses, in particular from Brown, Merkel and Sarkozy. I can’t find it in me to give a crap about this issue, but doubtless it will command saturation media coverage all week.  More substantive on the banking front will be the question of whether concrete proposals are advanced for hedge fund rules or financial supervision regulation - lots of noise here, but not much specificity so far.

- We’ll also hear lots of debate about when to wind down stimulus programs – which was a big issue at the EU’s preparatory summit (continentals more hawkish, but Brown edgier about turning the taps off). Goldman Sachs’s Jim O’Neill has an op-ed in the FT this morning arguing that while co-ordination was needed for starting the stimulus off, it’s less necessary to have co-ordinated exit strategies.

- The IMF and the World Bank have been doing good advocacy about the need not to forget about low income countries. Zoellick and Strauss-Kahn are both arguing that LICs have an external financing deficit of around $59bn this year (for comparison, that’s exactly half the 2008 global aid total). On the plus side, G20 members have actually delivered the $500bn they promised the IMF – which means the Fund can front up around a third of the total needed. Strauss-Kahn is also talking about a breakthrough on IMF governance reform.  (Believe it when I see it.)

- We’ll hear a lot about climate, but it’s hard to see what deal the G20 is supposed to cut (especially with Ban Ki-moon’s heads-level climate summit in New York the same week). The story the media runs with will be all about pressure on the US to do more, following Japan’s announcement of a tougher 2020 emissions target, and the EU’s long-awaited finance package. (Still, Obama ain’t the problem – the real issue here, of course, is that things don’t look great in the US Senate.)

The issue on the agenda that I’m most interested in for next week, though, is trade. First, what – if anything – will the G20 say on protectionism? For all the warm words at the London Summit in April, it’s increasingly clear that most G20 countries are in breach of their commitments – right now most notably in the case of the US, whose new tire tariffs are disastrous.  Dan Drezner’s take on this is worth reading (things are “very, very scary”) – but on the other hand, Alan Beattie thinks White House chief of staff Rahm Emanuel may have a crafty and ultimately beneficial political calculus in mind.

On a related note, how intriguing to see US sherpa Mike Froman talking up Pittsburgh’s chances of tackling global economic imbalances (“we hope to reach agreement on a framework for balanced growth, for agreeing on how to address the imbalances that led to this crisis and on some process for holding each other accountable”). Not what I expected – but great, if he can pull it off.  That said, I found myself wondering last night: is it conceivable that this is part of a messaging strategy to defend the tire tariffs? Hollow laughs all round if so.

Finally, the issue no-one’s talking about but everyone should be: the impending return of the food / fuel price spike. All these stories about oil companies finding new giant fields are so much straw in the wind. (So the new Jubilee field off Sierra Leone has 1.8bn barrels? Great: a whole twenty-one days’ global demand. Colour me thrilled.) The more fundamental point is about demand, which is picking up again in the non-OECD economies – and let’s remember that it’s in these countries that all the demand growth for oil will come between now and 2030.

The stage remains firmly set for a renewed oil supply (and hence price) crunch in the short term – and when that happens, food prices will go straight up too, as costs for transport, fertiliser and on-farm energy use race upwards and biofuels become even more competitive as a source of demand for crops. We’re already at a baseline of 1.04bn undernourished people (compared to 850m before the last food price spike) – do the maths. So my wish list for the G20?

1. $6bn funding for WFP – now.
2. Leave the trade round on hold, but agree emergency WTO rules against food export restrictions (like the ones that already exist in NAFTA).
3. Build up a multilaterally managed emergency food stock – maybe part real, part virtual (see Feeding of the 9 Billion for full details).
4. Commit to universal access to social protection systems by (say) 2015 – and lock the funding in place, now (only 20% of the world’s people currently have access to them – but these are the best-defence resilience mechanism for poor people facing price spikes, way better than price controls or economy-wide subsidies)
5. Bring China and India into full IEA membership, so that they’re part of its emergency supply management mechanism.
6. Start driving real inter-agency coherence by commissioning the most important multilateral agencies for scarcity issues – UN, Bank, Fund, OCHA, WFP, FAO, IEA – to produce a joint World Resources Outlook. We need the integrated analysis; we need the political momentum it will create.
7. Ask Ban Ki-moon to set up a High Level Panel to look at the international institutional dimensions of climate, scarcity and development – covering not just the UN, but the entire international system. This is the bit of international system reform that both the 2004 and 2006 High Level Panels left for another day. Today is that day.

Unfortunately, US politics being what it is, the increased funding is part of another bill… an Iraq war financing bill. Of course, this means that Congressmen and women can’t vote for IMF funds without also voting for war funds and can’t vote against war funds without also voting against IMF funds. (And vice versa.) According to Mark Weisbrot:

from the beginning, the administration has faced tremendous obstacles to getting a majority members of the House of Representatives to vote for the money in an up-or-down vote. This is because many members of both parties are afraid that it would be seen as another taxpayer bailout for the financial industry – and foreign banks at that.

So we are left with a state of affairs in which some Democrats are rebelling against the Bill for war reasons, and others because they want moves on IMF reform (particularly in terms of its dangerously austere lending conditions) in exchange for the increasing funding proposed. Few would argue that this is a sensible and eminently just request. However, the US Treasury (which of course has an enormous degree of sway over IMF policy) has refused to commit to this as a condition of the increased funds. Republicans, meanwhile, ostensibly just want the IMF money put to a separate vote. But (Weisbrot again):

Interestingly, the Republicans are not trying very hard to get the IMF money removed. They are not saying anything on television or in the media. This indicates that they may want this money to pass with only Democratic votes, so that they can attack the Dems – especially those in conservative districts – when the money ends up bailing out the European banks in eastern Europe.

Of course, that’s a solid criticism and no doubt it’d play very well. But at the end of the day, this is exactly what the IMF is meant to do, it’s part of what it was set up for and it’s certainly part of the job of a hegemonic country that claims to be ‘ready to lead once more‘.

MR. GIBBS:  One quick announcement before we get started.  The United States will host the next G20 summit, September 24th through the 25th, in Pittsburgh, Pennsylvania.

Q    Where?

Q    What?

Here’s the answer to the ‘Why Pittsburgh?’ question, taken from a White House statement quoted in the Pittsburgh Post-Gazette:

Pittsburgh has demonstrated a commitment to employing new and green technology to further economic recovery and development.

Yarone Zober, the Pittsburgh Mayor’s chief of staff, echoes the point in the same article:

Pittsburgh has really been a model for an economic turnaround,” he said, noting the smokestacks-to-knowledge transformation of the regional economy and the development of environmentally friendly “green” job sectors.

More on Pittsburgh’s turnaround in this Huffington Post piece.

As I noted back in April, the London Summit was a respectable outcome, but fell disappointingly short on the green new deal front. But with this backdrop, and an agenda that for now still remains wide open, maybe – maybe – the September summit will do better.