G-20 will be Sounding Board on U.S.-EU Divergences: Tightwads or Spendthrifts?     Print Email

As leaders head to Toronto for a G-20 summit meeting this weekend, the stage is set for the EU and the U.S. to air their clashing views about the right priority for national fiscal policies at this stage of the crisis.

The meeting will thus be a sounding board – and little else. Major collective decisions are scheduled for the G-20’s subsequent meeting this fall in South Korea.

But a trans-atlantic clash of views has become increasingly strident about what fiscal strategy to adopt now amid signs of global economic recovery. The Obama administration is publicly urging Europe to copy the U.S. example of continuing to pump money into the system in order to spur economic growth. But key EU leaders – notably Germany – are publicly insisting that it is time to rein in deficit spending to tackle the accumulating (and already monumental) debt.

The eurozone view is weakened by splits within its camp. France spearheads a “southern European” view favoring more flexibility (and more deficit spending) to help their economies grow enough to head off the risk of social explosions and even debt defaults in countries such as Greece.

But it is a Frenchman, Jean-Claude Trichet, head of the European Central Bank, who has become the point man in publicly supporting the German-held view that it is time to rein in spending and put muscle into steps (such as subsidy cuts). Thus, he aims to punish EU states that refuse drastic steps to start restoring budgetary equilibrium in member states of the eurozone.

Trichet put himself on a collision course with Washington this week when he came out strongly behind the view that tighter fiscal policies – ie austerity and not stimulus – are needed now in order to foster a sound recovery and foster sustainable growth in industrialized countries.

A German member of the ECB executive board, Jürgen Stark, added that the current policy of buying bonds unconditionally from eurozone countries will be temporary and pledged that the ECB would not buy bonds on the same scale as the US Federal Reserve or the Bank of England.

Ahead of the meeting, Tim Geithner, the US Treasury Secretary, has accused the eurozone of pushing Europe towards a 1930s-style slump by worrying too much about debt and refusing to inject more state funds into programs designed to create more demand and jobs in European economies.

The clash of views reflects diverging analyses about the psychology of consumers on opposite sides of the Atlantic. Trichet’s view is that European households “are going to be frightened” by any impression that public finances are on an unsustainable path of debt. In contrast, the Obama administration contends that deficit-spending fosters consumption and an optimistic mood that becomes self-sustaining.

A worst-possible outcome lies in a continuing divergence in real and declaratory policy on this question between the U.S. and the EU. “Everybody doesn’t have to do everything at the same time,” according to John Lipsky, a top IMF official. “But everyone has to do the right thing at the right time,” he is quoted saying in the National Journal. Othewise, if the transatlantic split (and the inter-EU division) widens, the stage is set for economies to be working at cross-purposes, with a potential for protectionism and other beggar-thy-neighbor policies.

That outlook means that this summit meeting should be an occasion for U.S. and European leaders – as well as those from South Korea and Brazil and other members of the G-20 – to talk through their own national perspectives and agree on at least a minimal degree of international coordination to allay global market fears. Investors fear and flee economic friction among major nations, so the G-20 will be thinking about some rhetorical consensus and looking for a future plan of action that allays bond-market worries (and pushes over the eurozone’s borrowing problems) with plans to curb spending while at the same time maintaining growth-momentum with circumscribed, well-targeted spending.

It is a balancing act and it may be needed to sustain fragile confidence through the summer. In practice, both sides may feel they need to maintain their public position in Toronto as a way of propping up domestic support until the more crucial agenda of the next G-20 summit in the fall.

European Affairs

 

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