Recovery or reform?

G20 rift remains behind show of unity

European leaders took their crusade in favour of deficit cutting to the Group of 20 summit in Toronto in June. While the final communique sought to conceal the unresolved differences within this group with a compromise of sorts, it has definitely given a boost to the European drive.

T Rajamoorthy

DESPITE attempts in their final communique  to paper over their  split, it is clear that the leaders of the Group of 20 (G20) major developed and emerging economies left their recent Toronto Summit with their deep policy differences on fighting the current recession wholly unresolved.

Even before the summit, these differences had come out in the open when, to the consternation of the Obama administration, Europe embarked on a frenzy of public spending cuts. To the US administration, this emphasis on fiscal probity, avowedly to overcome the debt overhang reflected in gaping national budget deficits, represented a clear abandonment of the policy focus on economic recovery by means of stimulus packages agreed at the G20's London Summit in April 2009.

To a US administration ever conscious of the mistake made by President Roosevelt in 1937 when he prematurely abandoned a policy of economic stimulus to tackle the Great Depression in favour of fiscal reform, such a course is clearly a risky one. Roosevelt caved in to pressure from right-wing deficit hawks, and to an embattled US administration currently facing similar pressures, Europe's change of course could hardly be welcome news.

Damage limitation

Fearful of increased domestic pressure to change course in line with Europe, the Obama administration decided on some damage limitation measures. On 16 June, 10 days before the Toronto meeting, Obama wrote a letter reminding G20 leaders of the London Summit decision 'to boost demand and repair our financial systems', which he claimed had 'worked'.

While paying due obeisance in his letter to the need 'to restore sustainable public finances', he makes it clear that this is a goal to be accomplished 'over the medium term'. In contrast, he is categorical that:

'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.'

Far from merely asserting the need to stay the course, in his letter Obama goes on to make out the case for a second stimulus package:

'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 avert a slowdown in economic activity.'

Such a stimulus package has long been urged by economists like Paul Krugman who fear that the recovery cannot be otherwise sustained. The recent steep fall in the US housing market may yet make such a course necessary, although it is not clear whether Obama will be in a position to push through any such package, given the growing domestic opposition to public spending.

Interestingly enough, in his letter there is a not-so-veiled attack against Germany, the leader of the deficit hawks, for its failure to pursue expansionary policies despite enjoying a balance-of-payments surplus. In Obama's words: 'I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses.' Although this is as much a criticism of China, it is equally a broadside against Germany, which has been highly critical of what it calls the US 'addiction to deficit spending'.

At the Toronto Summit, Obama received some strong support from India, China and Brazil on the dangers of the deflationary policies pursued by Europe.

India's Prime Minister Dr Manmohan Singh, endorsing the US assessment of the global economic situation as 'still fragile', warned that simultaneous withdrawal of fiscal stimuli by many countries 'could provoke a double-dip recession'. 'This,' he underscored, 'will have very negative effects on developing countries, and on the prospects for achieving the Millennium Development Goals.'

Chinese President Hu Jintao said: 'We must act in a cautious and appropriate way concerning the timing, pace and intensity of an exit from the economic stimulus packages and consolidate the momentum of recovery of the world economy.'

Brazil also expressed concern at the summit on the possible adverse impact of deflationary policies on developing countries. Even before the summit, Brazilian President Lula da Silva (who was finally forced to cancel his trip to Toronto because of serious floods at home) had, through his spokesman, indicated that he would call on the G20 countries to maintain their stimulus measures to boost economic growth.

It is inconceivable that Obama could have believed that his letter or the entreaties of these developing countries would be sufficient to persuade the European leaders to abandon their crusade against public spending. In any case, with US mid-term elections looming in which public spending would figure as a major issue, he could ill-afford a public spat with his European colleagues on this subject. Rather than risk emerging from the debate as a public spending profligate, it was in his own interest to leave the summit as a true believer in prudent public spending.

Hence, the US effort was primarily directed to ensuring that any schedule for budget cuts was more in the nature of a goal for the future rather than a rigid deadline. More crucial was the need to make sure that the time frame envisaged chimed with Obama's previously announced timetable for US budget cuts.

Toronto outcome

The result is that the final G20 communique commits 'advanced economies [to] at least halve deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016'. Additionally, the communique recognises that fiscal consolidation will have to be 'differentiated for and tailored to national circumstances', a phrase which affords not only the US but Japan (with its large budget deficit) even more wiggle room. The fact that this commitment is only to be undertaken by the 'advanced economies' spares the developing countries from having to embark on this traumatic exercise.

The explicit recognition in the G20 communique that the state of the global economy is 'uneven and fragile' and that 'recovery is the key' cannot, however, disguise the fact that Europe has succeeded in giving a push to the dynamics of development in the advanced economies in favour of renewed fiscal belt-tightening. The international sanction for such a policy is clearly a shot in the arm for those seeking to roll back the worldwide reaction against market fundamentalism. Of more immediate concern is the impact of these deflationary policies on developing countries and whether it will trigger off the much-dreaded 'double-dip' recession. In his most recent piece, written in the aftermath of the Toronto Summit, Paul Krugman has warned that the world is now in the early stages of a new depression because of Europe's 'wrong turn in policy'. One can only hope he is wrong.                     

T Rajamoorthy, a senior member of the Malaysian Bar, is an Editor of Third World Resurgence.

*Third World Resurgence No. 237, May 2010, pp 21-22