United in crisis, divided in recovery
Timothy Geithner, the US Treasury Secretary, would not have found a better time to say that the US could no longer drive the global growth. Speaking to BBC Friday, a day ahead of the Group of 20 Summit in Canada, Geithner, one of the close confidants of President Barack Obama, said the world “cannot rely as much on the US as it has in the past”. The message was loud and clear. The US expects the G-20 to take a proactive role to fuel growth.
Geithner’s stern remarks come amid concerns that European countries, hit by one of the worst debt crises in history, would push for deficit cuts at the G20 summit, risking fragile economic recovery. In sharp contrast, the emerging economies including India and China and North America held the view that the G-20 should continue its focus on steady growth and banking regulation, and avoid any abrupt withdrawal of the stimulus measures implemented over the last year.
It is this Atlantic split that casts shadow over the world’s most influential economic group’s summit. Sceptics fear it would render G20 another paper group as the member countries are unlikely to reach consensus on the future course of action. Most of the members are yet to start implementing the policy suggestions made in last year’s Pittsburgh summit.
One should appreciate G20 for its swift and coordinated actions to save the global economy from another depression. It committed to implementing the unprecedented and most coordinated expansionary macroeconomic policies, including the fiscal expansion of USD 5 trillion and the unconventional monetary policy instruments. It pitched for significant enhancement of the financial regulations, notably by the establishment of the Financial Stability Board (FSB); and strengthening of the International Financial Institutions (IFIs), including the expansion of resources and the improvement of precautionary lending facilities of the IFIs.
At the Pittsburgh summit in September 2009, the leaders designated G20 as the premier forum for international economic cooperation, marking an end of the decades-old domination of G-7, the group of the most advanced industrial powers in the world.
Since the Pittsburgh summit, global economy has strengthened. Most of the advanced developed countries are out of recession now. Emerging countries like China, India and Brazil are fast returning to their pre-crisis high growth trajectory. The US consumer spending is picking up and the macro economy is on steady growth path. Financial markets across the world look stronger than since the collapse of Lehman Bros. Still, a spectre from Europe has set out to spoil the party.
The sovereign debt crisis has brought Eurozone member Greece to the brink of bankruptcy. Spain and Portugal are also struggling with huge deficits. Other major economies, including Germany and the UK, have announced a host of deficit cut measures to stop the debt contagion.
It is against this background that the G20 leaders are meeting in Toronto on Saturday and Sunday. European Commission President Jose Manuel Barroso has already said Europe “can no longer afford to borrow and spend”. German Chancellor Angela Merkel, who aims to save 80 billion euros in the next four years, said sustained growth could only be guaranteed through getting a grip on deficits and debt. The Conservative British Prime Minister David Cameron is known for his ideological opposition to deficit spending.
Debt or growth?
Should the G20 focus on debt reduction or stimulating growth? This will likely be the most debated topic at the Toronto summit. The aggregate debt of the G20 countries is expected to hit 107.7 percent of GDP this year, almost three times the 37 percent debt forecast for emerging market economies of the G20 and up from 80.2 percent at the outset of the crisis in 2007, according to the International Monetary Fund. European countries will push for joint measures to cut down debt and public spending, which emerging nations fear will lead to stagnation.
The group still has a long and difficult to-do list, including forging consensus on new rules about how much capital that banks must hold, and making sure national financial regulatory reforms do not clash on a global scale.
European powers want the G20 countries to impose special tax on banks to raise capital to bail them out if crises emerge in the future. But emerging countries and the US feel this would scuttle the innovation and growth of the financial industry and pitch for strong regulation.
However, countries such as Canada and Japan, whose banks fared better during the financial crisis, are opposed even to regulation. Japanese Prime Minister Naoto Kan, in talks with German Chancellor Angela Merkel, said the reform debate should take into consideration each country`s situation. Why should we unfairly punish banks that did not contribute to the upheaval? Kan asks.
So the key question is that whether a debt-hit Europe will back the US agenda for spending-driven growth at the G-20? Or, as many fear, will the European austerity measures lead to the stagnation of global growth? Can the G20 mobilise resources to avert such a catastrophe? Difficult questions. And of course, difficult times for policy makers.