At some stage in the first half of this week, the stock markets appeared to show signs of recovery after having hit their lowest levels in years. This recovery was not across all the main markets, highlighting a lack of consistency. It would be pertinent to ask what is happening. With someone like Warren Buffet being quoted as saying that the American economy has fallen off a cliff, one would really have thought that Armageddon was round the corner. Moreover, with interest rates being reduced further by the European Central Bank to 1.5 per cent, it seemed very likely that ECB had some really bad news to which no one else seemed privy to.

A cursory look at what various financial and economic analysts are saying shows a wide divergence of opinions on cause and effects of the crisis in the financial markets and the economic recession. When it comes to the cure, the divergence in opinions widens even further. There are people who have been strong proponents of the free market policies, that have, in my opinion, brought about the current situation, and who insist that in spite of all the social pain that will be caused, banks and companies should be allowed to go down the drain and that governments should step in to support the economy. On the other hand we have others who believe that governments have not been doing enough to get their economies going once more, in spite of the fact that they have pumped in and continued to pump in billions of taxpayers' money.

All this tends to create more uncertainty as businesses and consumers around the world are left lurching not knowing who to take heed from. This uncertainty tends to lead to swings in business and consumer sentiment, and one can expect plenty of such swings before optimism returns. The point is how long will this last? Even in this regard there are different opinions. Will this be a V-shaped recession that is deep but short lived? Or will it be a U-shaped recession that is deep but of average length? Or will it be an L-shaped recession that is deep and prolonged?

This is why the G20 (Group of 20) summit in London next month is becoming increasingly critical. This summit brings together the heads of government of the world's leading 20 economies. They shall be addressing the economic recession and ways how to address it. There is recognition that the solution has to be a global one, because there is probably not one single economy that has been spared the pain, even if the pain has not been to the same extent across the board. Moreover, the interdependence of economies has reached such a significant level that any domestic solution in one economy, can never be fully effective unless it is in synch with what is happening in the other economies.

One must also take into account the fact that history amply shows that weak economies have given rise to political instability and eventually wars. This makes the need to find a global solution to the problem even more acute.

The lack of demand, which is characterising the current recession, needs to be seen as everyone's problem. Governments need to adopt fiscal policies that stimulate demand. I do believe that today consumers (at least those that are still in a job) have had their purchasing power restored given the low rates of interest and the low rate of inflation. The fear of inflation is also not there, as otherwise rates of interest would have stopped falling. The lack of demand is more due to a lack of business and consumer confidence, and fiscal policy need to address this psychological issue.

The second element that must be agreed upon is the need to return to a healthy state the financial markets. This is also a job for each and every government. The ease with which capital flows around the world and the ready availability of financial instruments mean that the so called toxic assets may be found where least expected. Unless the world financial system is rid of these toxic assets, it would be difficult for banks to trust each other fully again, thereby prolonging the credit crunch and in turn the recession.

The concluding point is about Malta. We are small, and therefore have to wait for whatever the G20 summit decides. On the other hand there are very few economies in the world that are as open as ours and so we are more heavily dependent on international developments. This reliance forbids us from putting our heads in the sand and from pretending that the world recession will not affect us. On the other hand, we need to manage the situation in a manner that is least painful to our society and that wastes the least resources possible.