COMMENTARY: G20 And EU, Juggling Tight Money And Growth …

• June 18th, 2012
• Posted by 7thmin

The world economic summit during 18-19.6.12 at Los Cabos, Mexico, has focused on Europe, with preferences clustering around the idea of partnering tight money policies, with ones supporting growth.

MESSAGES TO G20

The meeting of the G20, leading industrial nations, has heard the same message from diverse quarters.

The World Bank said the European Union needed to move more rapidly to settle the crisis over sovereign debt, and stimulate economic growth, so as to get member countries out of recession; and ease the threat of flow-on, into a world recession.

The Australian Prime  Minister, Julia Gillard (picture), told a pre-conference gathering her government backed the growth approach, calling for three sets of measures: Growth orientated changes; recapitalising stressed banks; and (“more Europe not less”) increased financial and banking integration within the EU.

The austerity-on-austerity approach, where debtors must strip down assets in order to pay current loans, if not dead in the water, looks to be sinking in mid-June 2012.

Voters in Greece sent a message relevant also to the mood of publics in other places, living with the reality of collapsing incomes and gross unemployment.

At Sunday’s elections, they did return a coalition led by the centre-right, committed to austerity in exchange for debt relief from the EU.

However, the electorate also delivered major support, and a large parliamentary bloc, to the left wing Syriza movement, wanting to abrogate the deal of austerity and demand much easier terms for staying with the Euro.

Backing for the pay-back priority is very conditional; families and businesses in countries that are in trouble say that they know something from experience lived close-up: austerity-on-austerity means less chance of being able to generate recovery, even future ability to pay debts.

(French voters likewise, in  parliamentary elections on Sunday, gave an outright majority to President Francois Hollande and his Socialist Party; giving a try to his idea of less austerity, and emphasising Europe-wide solutions to the crisis over debt).

Political leaders attending summits have to take note of that.

BRIEFINGS – “MORE EUROPE NOT LESS”

The following is a treatment of the accumulating thinking in Europe, on what’s been happening, and ways to go:

One theme of the ongoing crisis over finance and the economy, since 2008, is that solutions being worked on by the European Union usually call for more “Europe” not less.

Said one senior government official: “The delight of many commentators speculating on the idea of a break-up of the European Union, does not make sense; it would be against their own interests.”

In fact day-by-day consultation among the 27 European governments is strong and routine.

Even the gap between continental Europe and the United Kingdom, with its distinctive large financial industry, “looks artificial” compared to the active consultation and collaboration in government that goes on.

That view is reflected in the actions of the EU at every turn, showing faith in the options for Europe-wide solutions, and seeing separatist ideas as the artificial ones.

GOVERNMENTS COP THE DEBTS

After the Global Financial Crisis of 2008, by wide consent seen as a product of the ingenuity of certain American investment bankers in their packaging of major debt, governments after committing to major relief for banks, then as a result found themselves under siege as debtors.

The European Union provided first the special funds to stave of collapse in Greece, and from this year the broader, and enormous, European Stability Mechanism, along with a new financial Treaty that requires binding collaboration.

See EUAustralia Online: “EU summit on economic moves …”, 3.3.12; “EU summit agrees on finance pact”, 31.1.12.

Briefings both by EU national officials lament not the embarkation on the currency union with the Euro but the impossibility at the time of providing with it, more of a political union.

It set up its centralised monetary policy, with the Euro and the European Central Bank in Frankfurt, but without a common fiscal policy.

DEALS THAT WERE NOT KEPT

The national governments at the time could not deliver that; it was a move that the domestic political systems could not ingest; it would have to wait.

The agreed economic management parameters might have worked had they been adhered to, but in the larger and more prosperous economies, standards like the restraint level on national debt, from the start were not observed at any adequate level of fidelity.

For a weaker and smaller economy such as Greece, enjoying access to common rates of interest was a holiday, for a time; but budgets would never comply; the size of those national budgets was outside of the remit of the EU to control.

The former Greek Prime Minister, George Papandreou this week reiterated his complaints of being “saddled with” deficits at 16% of Gross Domestic Product, against the EU requirement for 3%  — whether acquired on his own watch or, as he said, inherited form previous governments.

Yet the constant and ubiquitous use of the Euro, with the number of participating  countries built up to 17 by 2012, was expected to create inexorable  momentum for more governmental integration, including an  integration of fiscal policy – perhaps over 20-25 years.

CRISIS OUT OF A CRISIS

The Global Financial Crisis then intervened, plunging governments into a round of deficit spending, with some positive, but mixed results.

The stimulus was achieved at relatively little cost in stronger economies -  Australia, China, Germany, to a different extent in France or the United States.

Te US debt reached 100% of GDP; Japan somewhat more; Europe overall somewhat less.

The European problem since then has been the uneven distribution of the sovereign debt, in a region with the shared currency, where all banks had been lending at similar rates of interest

The German state was managing with debt running to 70%, Greece was overwhelmed, its debt at 200%; Portugal and Ireland in similar predicaments.

With governments unable to meet debt commitments the bond rates went up against them, generating a still greater sense of falling confidence among lenders.

The response has been a European response, to put money in to European wide support for governments under pressure; to seek to repair the piling up of debt, and provide reassurance, by putting together the guarantees for the weakest performers.

IF NOT ENOUGH; WHAT TO DO NEXT?

That, to date, does not look to have been enough; not enough money, and not enough in the way of generating confidence.

The main debtor countries are now calling for the issue of Eurobonds, for risk-sharing, all the Eurozone countries at least, borrowing together.

“Make German taxpayers responsible for the debt of Spanish taxpayers”, said one of the briefing notes in circulation this week; a reference to the domestic political difficulties of the governments.

German voters feel put-upon by a borrowing nation such as Greece, with a disastrous record of failing to gather adequate revenues through tax; likewise Greek, Spanish or Portugese voters will refer to the state of recession and social despair now being  endured; demanding that their own efforts at restitution be recognised and supported.

MORE “EUROPE” NOT LESS

By this week, the notion was being cultivated, that policy makers and government leaders might now be getting ready to “charge ahead” towards the goal of fiscal unity; more like a united states of Europe, a case of again, going for more “Europe” than less.

The charge might see the agreement of stronger states to a common debt pool, but at a charge to lesser ones, an early and fairly comprehensive hand-over of their sovereign powers.

Renouncing sovereignty over budgets is not the same as being colonised by Germany; it would mean, rather, renouncing in favour of  the federal power, the EU where member countries have their allocation of power, and consultative rights, under the terms of the expansionist Lisbon  treaty.

It is, said one diplomat, a “fork in the road”; one way to uncertainty, the other way to a strengthened EU, but weakened national budgeting power.

Taxation and regulation would be again prominent on the agenda, seeing some roll-back on the deregulation of the last three decades.

Solid banks would be at the core; maybe something along the lines of the Australian model there, in the words of one observer, commenting also:
“It seems we yielded too much to the financial managers during that time”.

Reference

ABC Online, Sydney, “Learn from us on economy, Gillard tells world leaders”, 18.6.12. http://www.abc.net.au/news/2012-06-18/gillard-arrives-in-mexico/4076000, (18.6.120.

G20-12 Mexico (home), Los Cabos, “Leaders’ Summit”. http://www.g20.org/en, (18.6.12).

Lesley Wroughton, “G20 has bought time, more force needed-World Bank”, Reuters, London, 17.6.12. http://in.reuters.com/article/2012/06/17/g20-worldbank-idINL1E8HH2I720120617, (18.6.12).

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