The G20 Summit
As the Globe and Mail reported 562 arrests of those protesting the summit, the G20 leaders released their final communique. It represented a victory for those like Merkel and Cameron who were pressing for deficit reduction to be the key aim. The final communique stated:
Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges o aging populations, and avoid leaving future generations with a legacy of deficits and debt. The path of adjustment must be carefully calibrated to sustain the recovery in private demand. There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recover. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will a least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
We see the opposing views of Europe, China and the USA in this summary. Presumably Chinese and US pressure led to the
There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recover.
Whereas the European right seems to have won the conclusion
There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will a least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
How achievable are these aims?
Can they half deficits by 2013?
When considering individual economies there is always the possibility of reducing deficits by exporting more, but for the whole world this does not apply. How can the whole world reduce deficits in the midst of a recession?
It can only do it if the private sector as a whole, world wide, saves less. And how can this happen?
The most obvious solution — to sharply raise taxes leaving the wealthy of the world with less money to save — seems to have few advocates, so we are left with three other courses of action.
- The most likely initial scenario, the budget cuts of Cameron, Merkel etc plunge the economy of Europe at least into a much deeper recession as a result of which millions of newly unemployed stop making payments into pension schemes and bring down the level of saving.
- The next alternative is that private firms start borrowing on a large scale to finance new investment. This is not impossible, but is unlikely until the private commercial sector has improved its liquidity.Companies have to go through a period of saving to do this. The savings of the private sector must balance state borrowing, so what is happening is that firms are offloading their debt onto the state as the borrower of last resort. Once they have shifted enough debt onto the state, and if world demand looks buoyant, they might then start borrowing to invest again. But this requires governments across the world to go on borrowing until private investment picks up. If they immediately start to try and cut the rate of borrowing and even try to run down the total level of outstanding debt by 2016, as the communique states, the whole process stalls. The communique implies that the private sector is to become a net-borrower from the state sector by 2016 — an extraordinary unlikely prospect.
- The one plausible and progressive mechanism mentioned is to expand demand in the surplus economies.
Surplus economies will undertake reforms to reduce their reliance on the external demand and focus more on domestic sources of growth. This will help strengthen their resilience to external shocks and promote more stable growth. To do this, advanced surplus economies will focus on structural reforms that support increased domestic demand. Emerging surplus economies will undertake reforms tailored to country circumstances to:
• Strengthen social safety nets (such as public health care and pension plans), corporate governance and financial market development to help reduce precautionary savings and stimulate private spending;
• Increase infrastructure spending to help boost productive capacity and reduce supply bottlenecks; and
• Enhance exchange rate flexibility to reflect underlying economic fundamentals.
There is blatant hypocrisy here. Surplus economies are supposed to be expanding domestic demand, but Merkel, the head of Germany with the 3rd largest trade surplus is determined to retrench rather than step up domestic demand. In effect the pressure on surplus countries is addressed exclusively to China. There is no doubt that were China to put in place really large scale social democratic reforms, then domestic demand there would rise, with significant expansionary implications for the whole world. But for now, China’s trade surplus continues to grow, contra the declarations of the the communique. The sorts of changes that the communique asks for in China actually require a change in the political balances of forces towards the working classes in China. The fact that Hu Jintao was willing to allow even this much to go into the communique, along with the successes of the recent strike wave in China, indicates that this internal change may be beginning to happen.