ANAYLSIS:The big change at last weekend's meeting of G20 finance ministers was a decision to drop support for fiscal stimulus, writes PAT McARDLE
THE HEADLINE from the G20 finance ministers’ meeting in Busan, South Korea, at the weekend was the decision to drop support for fiscal stimulus, not because they think their economies are motoring ahead, but because they feel they have no option.
This recognises that many EU economies are effectively in a situation similar to what Ireland was in 18 months ago and in which Greece found itself earlier this year. Events are now being dictated by the markets, and the EU bears much of the responsibility because of its mishandling of the Greek crisis.
The shift in policy is captured in the following quote from the communiqué:
“Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal . . . institutions.”
This was in marked contrast to their statement just a few months ago that policy stimulus should be maintained until “the recovery is firmly driven by the private sector and becomes more entrenched”.
George Osborne, the new British finance minister, claimed credit for the shift, which was opposed by the US.
The Conservatives opposed Gordon Brown’s stimulus in late 2008 and will have welcomed the external support they got at the weekend as they face into a tough budget this month. The reference to “strengthening fiscal institutions” appears to refer to the UK, which has introduced a new Office for Budget Responsibility which takes tax forecasting away from the treasury and the possibility of political influence.
The US economy is so weak that the Obama administration is considering further fiscal stimulus. Treasury secretary Timothy Geithner’s letter to his colleagues urging that “the necessary and inevitable withdrawal of fiscal . . . stimulus needs to be calibrated to proceed in step with the strengthening of the private sector recovery in our economies” was to no avail.
France’s Christine Lagarde said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority it’s supporting growth.”
ECB president Jean Claude Trichet was said to be pleased – he has long believed that fiscal credibility is a necessary precondition for confidence and sustainable economic recovery.
Even IMF managing director Dominique Strauss-Kahn, who has promoted fiscal stimulus since early 2008, threw in the towel, saying “I am not the champion of fiscal stimulus, but the champion of right fiscal policy”.
It was, thus, a comprehensive and conclusive outcome, albeit one that does raise some major issues. These were highlighted in Geithner’s letter, which expressed “concerns about growth as Europe makes needed policy adjustments that threaten to undercut the momentum of the recovery”, adding that fiscal tightening would not “succeed unless we are able to strengthen confidence in the global recovery”.
The US is taking a much keener interest in matters European, with President Obama intervening recently to urge the EU to agree a bailout plan for indebted peripheral euro states.
Mohamed A El-Erian, chief executive of investment management firm Pimco, captured the mood when he advised that “investors should keep their seat belts on and tight”. This was a bit of a mixed metaphor, since the markets, which Mr El-Erian here represents, are the ones in the driving seat.
We can expect to hear a lot more about structural reform and the rebalancing of global demand. It is not clear what this means other than that the US would like China to let its currency, the renminbi, rise, thereby curbing Chinese exports and facilitating purchases of US imports, while emerging markets should boost global demand.
For example, there was no sign that Germany came under pressure to act to counterbalance cutbacks elsewhere in the EU; indeed Angela Merkel is busy putting the finishing touches to her own plans to cut government spending.
The other big news concerned the proposed tax on banks. The finance ministers stayed up negotiating until 5am on Saturday before they agreed to drop proposals for a worldwide levy on banks, bowing to a wave of opposition led by Canada.
Instead, they said banks should make contributions only in countries where taxpayers had bailed out highly indebted banking systems. Even then, implementation of the levy should take into account each nation’s “circumstances and options”.
Bank levies are still likely to be introduced in the US, UK and many EU countries. However, they will now likely be smaller than otherwise, as countries struggle to maintain a playing field that is not too uneven.
The G20 will develop a framework or set of principles to minimise problems of double taxation, etc for those countries that do impose bank levies.
There was some good news at the weekend. Since most countries, Ireland included, propose to export their way out of recession, there was a concern as to where the demand might come from given that one country’s exports are another’s imports. Accordingly, the IMF was given the job of running simulations to see whether the individual forecasts supplied to it by the G20 countries added up.
Surprisingly they did, and the IMF has a baseline forecast that global growth will be 4 per cent – not bad, except that much of it is from the “new” as opposed to the “old” world.
This could be boosted by a further 2.5 per cent over the next five years – equivalent to 30 million extra jobs – provided that appropriate reforms are introduced.
As to the nature of these reforms, this has yet to be spelled out by the G20. We can look forward to a few more late-night sessions.