G20 Toronto. Stimulated Economic Growth Vs Sovereign Debt Risk
Thursday, June 24, 2010
, Posted by Unknown at 2:55 AM
An artificial lake, mp3-bird´s twittering, food taster for the banquets. Canada is undoubtly proud to be the host of the G20 summit on June 26-27. As one of the few developed countries without crisis pain, Canada grasps the opportunity to spruce up its image by investing more than USD 1 bln 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 the land of milk and honey context, G20 leaders will face one of their most ambivalent agendas of recent years.
That tells a lot.
Instead of being confronted with the traditional distinction between developed and developing countries, Toronto will welcome leaders of developed countries with a non-aligned agenda.
The United States Agenda
The United States understands the dependence of a robust recovery on domestic demand. While not ignoring the long-term risks of a public-debt/GDP ratio, Obama recognizes the weakness of the US consumer and speaks for a continuation of stimuli programs. In a letter from the President Obama to G-20 Leaders, his expectations are clearly outlined.
Our highest priority in Toronto must be to safeguard and strengthen the recovery. 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 alike are in a comfortable situation. They can sit and wait, watching the developed countries fighting over their strategy of 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 will be the consequences?
I expect some consensus on global financial regulation, accounted as ´quick wins´. I do not expect any concessions on either side of the Atlantic with regards to their budget spending plans. As a consequence, we will see a significant drag on world growth. I support the idea of emerging countries to expand their domestic consumption base and re-orient their exports from developed to other emerging countries. They will simply not expand fast enough to get immune against the Western suffering. It will be interesting to see the Western leaders disagreeing with each other while trying to save their face in front of their emerging, upper-handed friends.
Currently have 0 comments: