The City of Toronto, Canada – a truly international destination – was undoubtly proud to be the host of the G-20 Summit this past weekend, 26-27 June. As one of the very few developed nations hit hard by the global financial crisis, Canada grasped the opportunity to spruce up its image by investing more than $1Bn (US) in the get-together – which is 60% more than Japan, the previous record holder, coughed up for the G8 gathering in Okinawa in 2000. Despite Canada’s modern ‘land of milk and honey’ narrative, G-20 leaders faced one of the most divided and ambivalent agendas in recent years. And as is usual, the G-20 Summit appears to attract protest and anarchy. See rioting video here.
Coming on the heels of last week’s G-8 Summit in Muskoka, Ontario, G-20 officials met in Toronto this weekend, where differences between the Western allies over the balancing act between reining in deficits and spurring growth via more stimulus policy dominated debate. President Barack Obama representing the America position, pushed his counterparts to also increase capital standards for banks.
Leaders did agree on the need to cut deficits in the medium term. However, their joint statement will also urge countries with the most precarious fiscal positions to accelerate action to reduce deficits, according to the officials.
“Discussions in the G-8 have shown that it is possible to reconcile some conceptual differences,” European Commission President Jose Manuel Barroso told reporters in Toronto on Sunday. “We are hopeful that it will be possible also in the G-20 to agree on coordinated, graduated and differentiated exit strategies.” The draft of the Toronto Declaration included targets championed by Canadian Prime Minister Stephen Harper to have countries halve deficits by 2013, and start to stabilize their debt-to-GDP ratios by 2016. The officials G-20 statement will echo an agreement reached by finance chiefs in Busan, South Korea, earlier this year.
The agreement would allow the U.S., which has stressed the need to maintain fiscal stimulus to underpin growth, to delay budget consolidation measures, while the U.K., with the highest deficit in the group, will have its austerity program endorsed. The G-20 will call also on countries with current account surpluses, such as Germany and China, to increase sustainable economic growth, the official added.
Earlier today, German Chancellor Angela Merkel said countries should pursue “solid” fiscal policies, and stressed her budget-cutting plans won’t derail the global economic recovery. Meanwhile, European leaders, including Merkel, “took a very clear position that solid fiscal policy is part of a sustainable growth policy,” she said. Merkel said her view that German consumers will spend more if they feel the nation’s finances are in order received “very broad understanding.” G-20 finance ministers this month signaled deeper concern about the economic and fiscal outlooks than when they last met in April in South Korea.
The United States Agenda
In a letter from the President Obama to G-20 Leaders, the U.S. position was clearly outlined.
The U.S. understands the dependence a robust recovery has on domestic demand consumption, and high employment figures. While not ignoring the long-term risks of a the debt to GDP ratio, the Obama Administration recognizes the weakness of the US consumer spending and anemic employment numbers necessitates a continuation of stimulus policies.
It seems to me, our highest economic policy priority in Toronto must be to safeguard and strengthen the recovery. That means another stimulus shot to bolster the faltering growth data. We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now. This means that we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong. It is essential that we have a self-sustaining recovery that creates the good jobs that our people need. In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avoid a slowdown in economic activity.
And now addressing China:
“A strong and sustainable global recovery needs to be built on balanced global demand. Significant weaknesses exist across G-20 economies. I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses. Our ability to achieve a durable global recovery depends on our ability to achieve a pattern of global demand growth that avoids the imbalances of the past. … I also want to underscore that market-determined exchange rates are essential to global economic vitality. The signals that flexible exchange rates send are necessary to support a strong and balanced global economy.”
The EU Agenda
The European representatives are usually aligned with North America. This time its different. The rigidity of market forces with respect to their public debt/GDP impressed European politicians. The spiral of downgrades, sky-rocketing credit default swaps and the lack of strong leadership contributed to an environment of fear that led to an implicit agreement of protecting their credit rating over protecting the fragile recovery. Exactly inverse to Obama´s understanding. No doubt, the situation is ambivalent. As Jean Pisani-Ferry writes:
“The advanced countries face a dismal budgetary situation, with deficits averaging 9% of GDP in 2009 and the prospect of public-debt ratios rising from roughly 70% of GDP prior to the crisis to more than 100% of GDP in 2015. According to IMF calculations, to reach a 60% debt ratio in 2030 would require a budgetary adjustment of almost nine percentage points of GDP on average between 2010 and 2020. While some countries in the past undertook adjustments of similar magnitude, a generalized consolidation of this sort is without precedent.”
The failure of Europe is to misunderstand the different depth of their pockets. If Germany and Greece run significant austerity measures, how do they think the EU-wide imbalances will ever get reduced? The only domestic solution I see is to increase the stimuli of countries that still can afford it (ie Germany, Austria, Luxembourg, NL, some of the Eastern members and to some extent France) and have the rest run their budget cuts. We are far away from this ´in-between´ solution. The British Prime Minister David Cameron announced “years of pain ahead,” German Chancellor Angela Merkel outlined a $100bn retrenchment plan, and French Prime Minister François Fillon a similar $80bn plan.
The Emerging Markets Agenda
China and the other BRIC economies are in comfortable positions economically: they can sit and wait, watching the developed countries debate which strategy is best; and how to not lose too much political and economic power to the Emerging world. Their public finance situation is entirely different. Jean Pisani-Ferry again: “While domestic credit booms may be a threat in the future, emerging-market banks have mostly remained immune from the fallout of the financial crisis. As a result, domestic non-financial sectors do not face the prospect of deleveraging.
More importantly, the fiscal challenge for these economies is of much lower magnitude than in the advanced world; in fact, it barely exists. The starting points are a 40% public debt-to-GDP ratio and an average budget deficit that, as a share of GDP, is four percentage points lower than in the advanced world. Against the background of much faster potential growth, only a minor effort is needed to keep the debt ratio around the 40% level.”
What Outcomes Can We Expect..??
Actually, I don’t expect any huge policy outcomes or a substantice declaration at all. Perhaps just some kind of a “yes, we need to talk more” resolution and minor decisions. Other than that, no really because global summits like this are driven by consensus – especially when faced by a common threat, for instance, like a global economic crisis. Even though it is going to make Toronto the center of the world for few days, I expect only weak consensus on the coordination global financial regulation. I don’t expect any concessions on either side of the Atlantic with regards to the dichotomy between stimulus spending versus deficit fighting. To wit, we have this, the 2010 G-20 ‘Toronto Declaration.’ Clearly, we need both, but as an economic priority, with an anemic consumer and employment data; and a hemorrhaging corporate sector, a stimulus plan seems the best of two poor choices. As a result, whichever route we go, a significant drag on global growth will follow. I also support the idea of Emerging Nations such as Brazil and India stepping up to help lead the way back to recovery by expanding their domestic consumption base and re-orient their exports from developed to other emerging countries. Even if successful however, they will simply not expand fast enough to fully mitigate economic contraction in the major developed economies. It will be interesting to witness the dynamic between humbled Western leaders disagreeing with each other, Emerging economies and non-aligned nations gain increased influence and a place at the table in global decision-making.
Source: BBC World News, ITN.com, CBC.com Image: G-20 Brochure
