G20: Much ado about something?
By Palash R. Ghosh | June 29, 2010 2:32 AM EST
While the normally tranquil streets of Toronto, Canada convulsed with smashed storefront windows, burning police cars, and the arrests of hundreds of protesters over the weekend, the leaders of the Group of 20 nations (G20) agreed to disagree on how to engineer their respective economic recoveries at their own pace.
Among the few points of consensus at the summit, the principals of the wealthiest of the G20 nations agreed to cut national budget deficits by 2013 by half. Summit host, Stephen Harper, the Prime Minister of Canada, further suggested that government debt "should be at least stabilized or on a downward trend by 2016".
A communique drafted by the group stated "measures will need to be implemented at the national level and will need to be tailored to individual country circumstances. We will each identify additional measures, as necessary, that we will take toward achieving strong, sustainable, and balanced growth.''
The unresolved question is how they can drastically reduce their deficits without curbing economic growth.
Another particularly contentious issue, proposals to impose a levy on banks, was largely dropped, left to the appropriate financial needs of individual nations.
One of the major themes of the G20 conclave was the division between the U.S. and Europe over stimulus expenditures -- President Obama and Treasury Secretary Timothy Geithner have warned that growth would be compromised by excessive cuts in government spending. On the opposite side, the mandarins of Euro Zone economies -- scared witless by near-financial collapses in Greece and Spain -- have started drastic austerity schemes to address historic public deficits in Britain, France, and Germany.
"All leaders recognize that fiscal consolidation is not an end in itself. There will be a continued role for ongoing stimulus in the short term as we develop the framework for strong sustainable and balanced growth," Harper said.
Obama and Geithner's statements seem rather hollow given that the U.S, is currently burdened by a debt that will exceed $1.3-trillion this year.
Banking, perhaps the vortex of the global economic crisis, has also figured prominently in G20 discussions. While the Americans have proposed the establishment of minimum capital levels for banks (so they can hold enough reserves to avoid fiscal support), the Europeans and others have complained that restrictions on banking activities would preclude a healthy economic recovery. However, G20 bosses agreed to reach a more conclusive pact on bank's capital requirements at the next meeting in Seoul, Korea in November.
Harper of Canada put the current dilemma succinctly: “Here is the tightrope we must walk. To sustain the recovery, it is imperative that we follow through on existing stimulus plans. At the same time, advanced countries must send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order.”
The communiqué also cautioned that global unemployment remained at "unacceptable" levels and that "there is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.''
Addressing China, which recently agreed to make its Yuan currency more flexible, the communiqué noted that there is a need for “increasing exchange rate flexibility in some emerging markets.” However, at China's request, any references to plans to maintain a floating yuan rate was removed from the communique.
“The very timing of the G20 summit was viewed as helping prompt China to renew [foreign exchange] flexibility after having been pegged to the US dollar since July 2008, wanting to avoid being more of a focus of attention at the meeting,” said a report in Action Economics.
“We continue to think that only slow progress is likely and that those expecting China's move to be a game-changer will be disappointed,” commented Julian Jessop, chief international economist at Capital Economics.
Strengthening the global recovery is key, the G20 communique indicated. "To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand," it said. "At the same time, recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances."
Overall, Jessop sees little in the G20 statements that is “genuinely new.”
For example, he cites, the plan to halve deficits by 2013 is “being spun as a bold new pledge (and welcomed by the UK and Germany in particular), although in fact it is essentially just a restatement of existing programmes and projections.”
Indeed, he notes, last week's emergency budget in the U.K. already planned to reduce the public sector deficit from 11% of GDP in 2009-10 to 5.5% in 2012-13, with the debt/GDP ratio peaking a year later.
“In some cases, notably the numbers from the US Congressional Budget Office, the recent projections of rapid falls in the deficit are little more than wishful thinking based on some dubious assumptions,” he adds.
Nonetheless, Jessop said, “even if the G20 failed to break any new ground, the statement is at least a reminder of what was already going to be a dominant global theme for the next several years: a prolonged period of fiscal austerity in major advanced economies that will keep growth weak and interest rates very low.”
Otherwise, the G20 has delayed any hard decisions on financial regulation at least until the next summit in November.
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