After last year’s show of unity comes the show of disunity. In the run-up to this weekend’s summit of the Group of 20 leading countries, leaders who once swore to co-ordinate policies to combat the crisis are bickering about fiscal policy. Some want to squeeze, others want to expand – but in the G20’s looking-glass world, those with the weakest growth call for fiscal cutbacks while those who have already leapt out of recession are relaxed about further stimulus.
In Germany, the world’s traditional cheerleader for fiscal continence, the economy expanded by just 0.2 per cent in the first quarter of this year. France and Spain both saw quarterly growth of a bare tenth of a per cent. The UK, whose new government has taken the baton in the race to see who can cut the deepest and the fastest, grew by 0.3 per cent. In contrast the US, where president Barack Obama’s administration has pushed for more stimulus, paced ahead briskly at 0.8 per cent. And Japan – whose plans for fiscal consolidation are so long term that they amount to continued laxity for now – outdid all of these with first-quarter growth of 1.2 per cent.
In a rational world, those with lower growth would choose larger deficits. But the crisis has converted Europeans who formerly paid only lip service to fiscal rectitude into born-again believers. Mr Obama has warned that the new-found fervour may be too much for Europe’s still-sickly economy. He could add that Europe is free-riding on US deficits. He is right to worry: if Europe takes a double dip, it will harm not only itself but pull down the rest of the world.
Not all is as it seems. Wolfgang Schuble, Germany’s finance minister, deflects criticism that he is forcing the eurozone through a deflationary grinder by pointing to a 2010 public deficit that is larger than last year’s. Admittedly, this is from a low base. But without touting it, the German government is, for now, a source of demand growth. Its consolidation plans are modest in pace and in scale.
It is necessary, of course, for governments to explain how they plan to rein in deficits in due time. Those in the crosshairs of capital markets have no choice but do so now rather than later. Those that can choose should prefer Berlin’s approach – talk tough on deficits, but don’t cut too much yet – to Westminster’s. The UK budget outdoes fabled German austerity with a deficit squeeze of a searing 2.6 per cent of GDP next year.
The deficit hawks (Mr Schuble included) also neglect the role of private demand. Spain, despite sound public finances, was undermined by a private sector deficit. And recovery will not take hold without private demand growth, still scarce in the countries on the warpath against deficits. Surplus nations must help – if not by public spending then by making consumers and businesses spend. China is, commendably, loosening its currency peg. Germany too must find ways to pick the locks on corporate or consumer savings.
Without more G20 solidarity, global politics could soon become nastier than mere bickering.
Squeeze splits G20
The G20 is being split by those nations that want further stimulus measures and those that want fiscal cutbacks. But without more G20 solidarity, global politics could soon become nastier than mere bickering.
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