G-20's Balancing Rhetoric --- A Bridge to Crucial Next G-20 Summit in November     Print Email

G-20’s Compromise Rhetoric Is Designed as Bridge to November Summit  – Meant To Be Crucial G-20 Event

The outcome of the latest G-20 summit had something for everyone – mostly in the form of delaying any drastic policy changes by any of the governments involved. No binding decisions were taken on implementing any of the changes in financial systems that were on the table ahead of the Toronto meeting. Instead, the artful main decision offered a (non-binding) pledge that governments should focus on how and when to start curbing their pro-jobs stimulus and move toward budget cutbacks as the basis for more sustainable growth.

The outcome allows people to save face on both sides of the Atlantic – notably “deficit hawks” in Europe and advocates of deficit spending in Washington. As a result, leaders of the world’s largest economies were able to emerge with a consensus. It is a good outcome in the current situation. Conventional wisdom says that markets (in this case, primarily government bond markets) buy on consensus and sell on discord. So the Toronto outcome suggests that national economies on both sides of the Atlantic will continue in their own ways (and with their own national rhetoric) to stumble out of the acute global recession during the coming months.

Sounding reasonable enough in June, that outcome will be tested in six months’ time when the next G-20 summit in South Korea convenes. It already has an agenda that stipulates decisions on issues that Toronto effectively kicked down the road.  The G-20 had already decided that it was the November meeting, and not the just-concluded Toronto session, that is a deadline for decision-making on a set of international regulatory and financial-policy rules intended to safeguard the global economy against a repetition of the current crisis.

As part of this longer-term agenda, Toronto also excluded any decisions about tougher global rules for banks. Despite a flurry of last-minute rhetoric on both sides of the Atlantic, there was no real prospect for action right now on controversial (but probably inevitable) demands for banks to hold more and better-quality capital so that they can absorb any future wave of heavy losses without needing to be bailed out again by taxpayers.

In the media reading of Toronto’s results, the main outcome was a graceful-sounding compromise between the U.S.-led insistence on continued deficit spending and the prevailing European view that it is time to make debt-reduction the new priority. The compromise stance was phrased as a joint goal for Group of 20 governments to cut their budget deficits in half by 2013 and “stabilizing” the ratio of public debt to gross domestic product by 2016.

It is the first time that the G-20, now the world’s leading economic body, has set dates for deficit reductions, but the targets are set at levels that can be accommodated by most governments without any change in current policies. The leaders signed up to a target they came here already pledged to achieve.

In any event, it is a non-binding goal. Nonetheless, this commitment marks at least a tactical rhetorical gain by the EU countries in insisting that deficits have emerged as the biggest threat to their economic stability. To placate Washington, this timetable was described as an “expectation” and not as a “deadline.” Some key phrases said that deficit reduction should be “tailored to national circumstances” and that austerity measures should be chosen to be “growth friendly.”

The Obama administration’s position in this face off was weakened by the fact that the White House has not tabled any proposal of its own to exert control over the sky-rocketing U.S. debt – and clearly has no intention to touch this political hot potato before the Congressional elections (and G-20 summit) in November. President Barack Obama’s credibility was weakened on the summit’s eve by the surprise resignation of his budget director, Peter Orzag, an early and close financial-policy ally of Obama. It is the first high-level defection from Obama’s team and apparently was prompted by Orzag’s view that the White House was unwilling to start tackling the nation’s worsening fiscal predicament.

In Toronto, Mr Obama repeated the U.S. mantra about the need to recognize that “our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.”

European Central Bank President Jean-Claude Trichet has been outspoken in advocating the need for early moves as fiscal retrenchment as the best way to revive public confidence and start a solid recovery.

This clash of philosophies is rooted in the contrasting historical experiences of Americans and Germans during the 1930s Great Depression. While Americans recount how the U.S. “spent its way back to prosperity,” the memory of Germans focuses on the national trauma of hyper-inflation after a fiscal collapse. Since Berlin runs the EU’s largest economy, its views – emphasizing fiscal responsibility – have largely prevailed against the French preference for a looser attitude toward deficit-spending as a way to escape the current economic dip.

European Affairs