In relative terms, as economic summits go, the
recent G-20 meeting was a spectacular success.
Unfortunately, one might not get that impression from the Bloomberg headline G-20 Coordination Fails as Governments Clash on Recovery Recipe.
Global policy makers are starting to clash over
their individual prescriptions for recovery as Europe demands lower budget
deficits while the U.S. warns against pushing exports instead of domestic
demand.
At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5,
Treasury Secretary Timothy F. Geithner said the world cannot again bank on
the cash-strapped U.S. consumer to drive growth and urged other nations to
stimulate their own demand.
Global policy makers are starting to clash over their individual
prescriptions for recovery as Europe demands lower budget deficits while the
U.S. warns against pushing exports instead of domestic demand.
At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5,
Treasury Secretary Timothy F. Geithner said the world cannot again bank on
the cash-strapped U.S. consumer to drive growth and urged other nations to
stimulate their own demand.
The conundrum is that governments are all trying to harness a rebound in
trade, which the Netherlands Bureau for Economic Analysis last week estimated
grew 3.5 percent in March, more than double February’s pace.
Companies from French beverage maker Pernod Ricard SA to Japan’s
Toshiba Corp. and Nissan Motor Co. are counting on foreign demand to stoke
earnings.
In the U.S., President Barack Obama aims to double exports over five years,
while China is refusing to bow to international pressure to allow an
appreciation in the yuan, which it has held at 6.83 per dollar for almost two
years to help its exporters.
Japan’s new prime minister, Naoto Kan, enters office with a reputation
for favoring a weak yen after saying as finance minister that he wanted the
currency to fall “a bit more.” French Prime Minister Francois
Fillon said June 4 the euro’s drop below $1.20 is “good
news” after a gain that was “penalizing our exports.”
Britain’s Osborne said last week in Beijing he is “keen” to
make the U.K. more trade-driven.
‘Who Will’ Buy?
“If everyone’s expecting to export their way out of trouble, who
will be buying?” said Alvin Liew, a Singapore- based economist for
Standard Chartered Plc. “Countries may resort to inward-looking
policies and protectionist sentiment.”
Merkel Says Recovery Can’t Trump Cutting of
Budget Deficits
Treasury Secretary Tim Geithner and German Chancellor Angela Merkel had a big
disagreement over policy action.
Please consider Merkel Says Recovery Can’t Trump Cutting of Budget Deficits
German Chancellor Angela Merkel said economic growth
can’t come at the expense of reductions in budget deficits, hinting at
differences with the U.S. over the pace of paring public spending.
The German government “believes we must not achieve growth at the
expense of high deficits,” Merkel told a news conference. Treasury
Secretary Timothy Geithner, who attended a meeting of G-20 finance chiefs in
South Korea that ended today, called on Japan and European countries such as
Germany to boost domestic demand to complement the U.S. “shift towards
higher savings.”
Merkel is pressing European countries for budget savings to protect the
stability of the euro, which has declined 16 percent versus the dollar this
year amid investor concern about deficits in countries such as Greece.
She’s heading a two-day Cabinet meeting starting tomorrow in Berlin to
set budget cuts for 2011.
Merkel Seeks ‘Decisive’ German Cuts
For more details on Merkel's proposals, please consider Merkel Seeks ‘Decisive’ German Cuts as Geithner Urges
Spending.
Chancellor Angela Merkel said Germany is poised for
a “decisive” round of budget cuts that will shape government
policy for years to come, fueling disagreement with U.S. officials who favor
measures to step up growth.
Speaking at the start of two days of Cabinet talks in Berlin called to identify
potential annual savings of 10 billion euros ($12 billion), Merkel said
Europe’s debt crisis underscores the need for efforts to ensure the
euro’s stability.
“It’s not exaggerated to say that this Cabinet conclave will give
important direction for Germany in coming years, years that will be
decisive,” Merkel told reporters today before the meeting in the
Chancellery. “We can only spend what we
receive in income.”
Merkel’s government is reining in its deficit and urging fellow
euro-region states to do likewise to thwart a sovereign- debt crisis. The
Defense Ministry said last week there are “no taboos” when it
comes to potential savings, including a possible reduction in the
army’s size by 100,000 active-duty soldiers plus scrapping conscription.
Tax rises, welfare cuts and the loss of about 10,000 civil servant posts are
among other measures being considered, Deutsche Presse-Agentur reported,
citing unnamed government sources. The Cabinet seeks to cut almost 30 billion
euros through the end of its legislative term in 2013, Bild newspaper said
yesterday, without saying how it got the information.
ECB Advocates Tightening as U.S. Urges Domestic
Demand Growth
It's not just German Chancellor Angela Merkel who disagrees with Geithner. So
does European Central Bank President Jean-Claude Trichet.
Please consider ECB Advocates Tightening as U.S. Urges Domestic Demand Growth
European Central Bank President Jean- Claude Trichet
and Treasury Secretary Timothy F. Geithner diverged on prescriptions to
sustain growth, with Europe set to tighten budgets and the U.S. seeking
stronger domestic demand.
The impact of narrower budget gaps “on growth could not be considered
negative because it would improve confidence,” Trichet told reporters
yesterday after meeting with Group of 20 finance chiefs in Busan, South
Korea. The need for such action is clear in “old industrialized
economies,” he said.
The remarks underline determination within the 16-nation euro area to shrink
budget deficits in the wake of a sovereign debt crisis that has led to a 750
billion-euro ($913 billion) rescue fund for the region’s weakest
members. The emphasis contrasts with the message delivered to the G-20 by the
U.S., which wants countries with trade surpluses, including China and
Germany, to stoke demand to help sustain the global recovery.
International Monetary Fund estimates backed up Geithner’s concern.
Managing Director Dominique Strauss-Kahn said at a press briefing that
efforts to cut budget deficits in rich countries could hurt growth over the
next two years. Stimulus measures implemented in the last two years that
haven’t expired yet should remain in place in advanced economies, he
said.
A study by the fund showed that fiscal consolidation, without market
deregulations that would bolster domestic demand, could shave as much as 2.5
percentage points off global growth and cost 30 million jobs worldwide.
The Busan meeting ended with no agreement on a universal bank levy and with
finance chiefs pledging to work toward a November deal on increasing capital
requirements for lenders.
G-20 An Amazing Success
With all the heated debate and every country doing what they want, inquiring
minds just my be asking "How the heck can you call this a success?"
That's a good question so let's highlight the positives.
Defining G-20 Success
·
Merkel and Trichet politely told Geithner to go to
hell. Given that Geithner needs to be fired, this is a positive event.
·
Europe is more concerned about sovereign debt issues
than stimulating growth. Only fools like Geither and the IMF would argue
against that.
·
No one paid any attention to Geithner or the
Keyenesian clowns at the IMF, most notably, IMF Managing Director Dominique
Strauss-Kahn.
·
There was no agreement on a universal bank levy. A
universal tax is the wrong approach to risk management and it punishes banks
with good lending practices.
·
Geithner made a complete fool out of himself.
· A dozen cheers for German Chancellor Angela Merkel
who said “We can only spend what we receive in income.” Finally Someone
gets it.
What more could you possibly ask for?
Another Look at the Impossible
In G20 Heated Debates; Europe Politely Tells Geithner Where To Go I took a look at the impossible.
“I continue to say that I see good news from
the current euro-dollar rate,” French Prime Minister Francois Fillon
told reporters yesterday in Paris. President Nicolas Sarkozy “and I
have been saying for years that the euro-dollar rate didn’t reflect
reality and was penalizing our exports,” he said.
French President Nicolas Sarkozy comment on the Euro highlights the
impossible task of making everyone happy.
The US, EU, UK, Japan, and China all want a weaker currency. It cannot be
done.
Today's statements from Alvin Liew, a Singapore-based economist for
Standard Chartered Plc. sums up the situation nicely ...
“If everyone’s expecting to export their way out of trouble,
who will be buying?” Countries may resort to inward-looking policies
and protectionist sentiment.”
As a result of reckless over-spending by nearly every country on the planet,
it is impossible to both save and spend at the same time. Saving is the
correct thing to do, even though it means more near-term pain.
Geithner needs to fired. He is hopelessly out of touch with reality. That
everyone ignored him at the G-20 conference is not only a step in the right
direction, it is the absolute best one could ever expect to come from an
economic summit.
Mish
GlobalEconomicAnalysis.blogspot.com
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